Net working capital
Net working capital is a business’s current assets — cash, receivables, inventory — minus its current liabilities, such as payables and short-term debt. It measures the short-term operating cushion a business needs to keep running: paying suppliers, covering payroll, and carrying inventory or unpaid customer invoices before that cash comes back in.
Every operating business ties up cash in its short-term cycle — inventory sitting on shelves, invoices customers haven’t paid yet, bills owed to suppliers. Net working capital measures the net amount of cash tied up in that cycle at any point in time.
Why it matters in a business sale
A buyer taking over the business also needs enough working capital on day one to keep operations running without an immediate cash injection. Deals commonly include a working-capital target, sometimes called a peg, so the seller delivers a normal, sufficient level of working capital rather than stripping the business of cash and inventory right before closing.
How it differs from cash itself
Net working capital is not the same as the cash balance shown on a bank statement — it nets inventory and receivables against near-term liabilities, so a business can be cash-poor but working-capital-healthy, or the reverse, depending on how quickly it collects from customers and pays suppliers.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Treadstone LawLegal commentaryGetting a Business Valuation Before You List
- 02Treadstone LawLegal commentaryHow to Read a Business's Financial Statements Before You Buy in Ontario
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