Net working capital (NWC) equals current assets minus current liabilities — the operating liquidity cushion (or shortfall) on the balance sheet.

How it works

Typical current assets: cash (sometimes excluded in deal mechanics), accounts receivable, inventory, prepaid expenses. Current liabilities: accounts payable, accrued expenses, deferred revenue (current portion), short-term debt.

Example: $2M receivables + $500K inventory − $1.2M payables − $300K accrued → NWC ≈ $1M. A growing hardware or enterprise SaaS business often needs more NWC as revenue scales because customers pay later than vendors must be paid.

In M&A, cash-free, debt-free deals frequently include a working capital adjustment: if actual NWC at close is below an agreed target, purchase price drops dollar-for-dollar; excess NWC may increase proceeds to the seller. Legal teams negotiate which balance-sheet items count as current for that calculation.

Why it matters

• Founders: Fast growth can look profitable on paper while cash strains from NWC build. Model the cash conversion cycle in fundraising plans, not just P&L.
• Investors: Buyout models tie NWC to free cash flow. Sellers who manipulate payables or inventory before close trigger post-close true-ups that LPs and deal teams watch closely.

Common mistake

Ignoring deferred revenue. For subscription businesses, large prepayments inflate current liabilities and can make NWC look artificially low or negative — definitions in deal letters matter.

Related ideas

See also cash-free debt-free, net debt, cash conversion cycle, and purchase price adjustment.