Module I· Working Capital & NWCBasic
Question
What is net working capital (NWC) — definition?
Answer
Formula
```
NWC = current operating assets − current operating liabilities
= (AR + Inventory + Prepaid) − (AP + Accrued + Deferred Revenue)
```
Not included
- Cash (except a minimal operating cash balance)
- Short- and long-term debt
- Tax items (separate)
- Dividends payable
Logic
NWC captures the cash tied up in day-to-day operations. When a company grows, AR and inventory rise faster than AP — so every growth phase needs additional NWC, which ties up cash and weighs on FCF.
Rule of thumb
NWC/sales runs at 5–25% depending on the industry.