A more specific definition of net working capital
For most companies, net working capital is calculated from five accounts on the balance sheet. On the assets side, the company's cash, marketable securities, accounts receivable, and inventory are considered. On the liabilities side, the company's accounts payable is the only account needed.
The formula from there is to add together the cash, marketable securities, accounts receivable, and inventory, then subtract accounts payable. The result, positive or negative, is the company's net working capital.
If the company's net working capital is positive, that indicates that the business has more short-term assets than it does short-term liabilities, and therefore is considered to have enough capital and liquidity to continue its operations in the near-term future. A company that has negative net working capital may have short-term liquidity problems, including insolvency.
Exactly how much net working capital a healthy company should maintain will vary from company to company, dictated by its operating model, industry, and capital structure. Companies can also utilize other balance sheet tools like short-term debt, lines of credit, and the timing of payable or receivable recognition to manipulate net working capital. Because of all these moving parts, there is no "one-size-fits-all" rule for net working capital.
