---
title: "What Is Net Working Capital?"
term: "Net Working Capital"
description: "Net working capital is current assets minus current liabilities — a measure of short-term liquidity and the cash tied up in day-to-day operations like inventory, receivables, and payables."
date: 2026-07-25T00:00:00.000Z
updated: 2026-07-25T00:00:00.000Z
topics: ["venture-capital"]
source: https://venturecapitaltracker.com/glossary/net-working-capital
---

# What Is Net Working Capital?

> Net working capital is current assets minus current liabilities — a measure of short-term liquidity and the cash tied up in day-to-day operations like inventory, receivables, and payables.

**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](/glossary/cash-free-debt-free), [net debt](/glossary/net-debt), cash conversion cycle, and purchase price adjustment.

## FAQ

### What is Net Working Capital in simple terms?

It is the money wrapped up in running the business over the next year — money customers owe you plus inventory minus what you owe suppliers and short-term bills. Positive NWC means more cash is tied up in operations.

### Why does Net Working Capital matter?

In acquisitions, buyers set a target NWC so sellers cannot strip receivables or delay payables before close. For founders, growing sales often consume cash through higher receivables and inventory before profits appear.


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Source: https://venturecapitaltracker.com/glossary/net-working-capital