Net working capital

In plain terms

Net working capital (NWC) measures the short-term financial cushion in your business. It's a simple subtraction: current assets minus current liabilities. Current assets are things you expect to turn into cash within a year — cash itself, money owed by customers (receivables) and stock. Current liabilities are what you owe within a year — supplier bills, short-term borrowing, VAT and PAYE due.

A positive figure means your short-term assets outweigh your short-term obligations: you have headroom to pay bills as they fall due. A negative figure means the reverse, and can signal a looming cash squeeze. NWC is closely related to plain working capital and to liquidity — all three describe how comfortably a business can meet its near-term commitments.

Why it matters to your business

Net working capital is one of the first numbers a lender, investor or supplier looks at, because it shows whether a business can keep the lights on without fresh funding. Healthy, positive NWC suggests you can absorb a late-paying customer or an unexpected bill; thin or negative NWC suggests every payment is a juggling act.

It's also a planning tool. Growing companies often see NWC tighten as they buy more stock and extend more credit to win sales — growth quietly consumes cash. Watching NWC helps you spot that squeeze before it becomes a crisis, and decide whether to fix terms, chase debtors faster, or arrange a working-capital facility to bridge the gap.

A worked example

A manufacturer's latest balance sheet shows current assets of £180,000 (cash £30,000, receivables £90,000, stock £60,000) and current liabilities of £130,000 (trade payables £85,000, VAT due £25,000, short-term loan £20,000).

Net working capital = £180,000 − £130,000 = £50,000. That £50,000 is the buffer funding day-to-day trading. If the company then wins a large order requiring £40,000 of extra stock bought on cash terms, NWC drops to £10,000 — still positive, but tight. That's the moment to consider whether short-term finance would protect the business from a stumble, rather than waiting until the buffer is gone.

Improving net working capital

You can strengthen NWC without raising new capital by speeding up cash in and slowing cash out:

• Collect faster. Invoice promptly, tighten payment terms and chase overdue accounts — or use invoice finance to release cash tied up in receivables.
• Manage stock. Avoid over-ordering; capital sitting in unsold inventory isn't working for you.
• Negotiate terms. Reasonable supplier credit keeps cash in the business longer.

Where trading is sound but timing is awkward, a flexible facility can top up NWC during the gap between paying suppliers and being paid. The goal is steady, comfortable headroom — not the largest possible figure.