Working Capital vs Net Working Capital: What’s the Difference?

Working capital and net working capital are two common financial terms used in accounting. Whether you’re trying to obtain a loan for your business, or if you’re simply hoping to improve your business’s cash flow, you may want to evaluate your business’s working capital and net working capital. Doing so will give you a better understanding of your business’s financial health. While working capital and net working capital may sound the same, however, they are different financial metrics with their own purpose.

Working Capital vs Net Working Capital: What’s the Difference?

What Is Working Capital?

Working capital or “gross working capital” refers to all of a business’s assets and financial resources. It’s designed to offer a general overview of a business’s financial health. You can calculate your business’s working capital by adding up all of its assets and financial resources.

Your business may have the following types of assets and financial resources, all of which are included in its working capital:

• Cash
• Accounts receivable
• Inventory
• Vehicles
• Investments and securities
• Money from loans

What Is Net Working Capital?

Net working capital, on the other hand, refers to all of a business’s assets minus all of its liabilities. When compared to working capital, it offers a clearer and more detailed representation of a business’s financial health. To calculate your business’s net working capital, you’ll need to first calculate its working capital. You can then subtract all of your business’s current liabilities from its working capital, which will reveal your business’s net working capital.

Differences Between Working Capital and Net Working Capital

Working capital and net working capital aren’t the same. Working capital only takes into account assets and other financial resources, whereas net working capital considers current liabilities as well.

Most businesses have at least some current liabilities. Current liabilities are debt. If your business has one or more outstanding loans, for instance, this debt will influence its net working capital. You’ll have to subtract the loan or loans from your business’s working capital to calculate its net working capital.

In Conclusion

While they may sound the same, working capital and net working capital are two unique financial terms. Working capital represents your business’s assets and other financial resources. Net working capital, conversely, goes one step further by considering your business’s current liabilities as well.

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