Glossary
Net Working Capital (NWC): Definition, Formula, and Why It Decides Deals
Net working capital is a business’s current operating assets minus its current operating liabilities: receivables, inventory, and prepaids on one side, payables and accruals on the other, with cash and debt set aside. It measures the short-term capital a company needs to keep running, and in an acquisition it is one of the most contested numbers at the closing table.
How to calculate net working capital
The formula is straightforward: current operating assets minus current operating liabilities. In an M&A context it is calculated on a cash-free, debt-free basis, so cash and interest-bearing debt are excluded and only the working capital the business needs to operate remains.
Working capital vs net working capital
The terms are often used loosely. Plain “working capital” sometimes includes cash and short-term debt. “Net working capital” in a deal means the operating figure, cash-free and debt-free, because the buyer is acquiring the operating need, not the seller’s cash balance or financing.
Is a higher or lower NWC better?
Neither extreme is good. Too little, and the business cannot fund day-to-day operations without an immediate cash injection. Too much, and capital is trapped in slow receivables or excess inventory. The right level is the amount the business genuinely needs to run at its normal pace.
Why it matters in a deal
A seller delivers the business with a target level of net working capital, called the net working capital peg, so the buyer receives it with enough operating capital to keep going from day one. Owners consistently underestimate that requirement, which is why a Quality of Earnings analysis tests it carefully before close rather than after.
Frequently asked questions
What is net working capital?
It is current operating assets (receivables, inventory, prepaids) minus current operating liabilities (payables, accruals), excluding cash and debt. It shows the short-term capital a business needs to operate.
How do you calculate net working capital?
Subtract current operating liabilities from current operating assets. In a transaction it is done cash-free and debt-free, so only the operating requirement is captured.
What is the difference between working capital and NWC?
Working capital can include cash and short-term debt; net working capital in a deal is the cash-free, debt-free operating figure a buyer actually inherits.
Where to next
For how the target level is set and trued up in a transaction, see the net working capital peg and the full Quality of Earnings due diligence guide. To work through a peg on a live deal, contact our transaction advisory team.
