How to Calculate Additions to Net Working Capital

Net working capital is calculated by subtracting a company's current liabilities from its current assets. This measure gives an idea of a company's short-term capital and its ability to quickly increase its liquidity to meet short-term obligations.

Changes to current accounts like inventory, accounts receivable, and accounts payable all impact a company's net working capital. To understand how net working capital can increase or decrease, we have to start with exactly how this metric is calculated.

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Rising cash. — Image source: Getty Images.

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After calculating the net working capital for last year and again for this year's balance sheet, we can quickly see that net working capital declined year-over-year. However, the company still has positive net working capital. That indicates that it does not have a short-term liquidity problem yet.

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By calculating the change in net working capital in this way, we can now take a closer look at the numbers to understand why net working capital either increased or, in this case, decreased over time.

On the assets side, the company's marketable securities increased, but the change was negligible. Its inventory, the largest component of its working capital, was constant. The two meaningful changes -- the $5,000 increase in cash and $5,000 decrease in accounts receivable offset each other. On the balance sheet side though, the company's accounts payable increased 43% to $50,000. That jump was the biggest driver of the change in net working capital for this company over the past year.