Question

What's the difference between working capital and net working capital? Between net working capital and net operating working capital?

Answer 1

Companies need capital to remain operational and grow, and the amount of capital a company has is a strong indicator of its financial health. Working capital can be divided into two categories: gross working capital and net working capital.

Gross working capital
Gross working capital is a measure of a company's total financial resources. Gross working capital is calculated by totaling a company's current assets such as cash, short-term investments, accounts receivable, inventory, and marketable securities. Liabilities are not taken into account when determining a company's gross working capital, and in this regard, gross working capital only offers a limited picture of a company's financial standing.

Let's say a company takes out a $300,000 loan to finance its expansion. It may currently have $300,000 on the books, which will add to its total assets and increase its gross working capital. However, that loan will also add to its current liabilities, which aren't reflected in gross working capital.

Net working capital
Net working capital provides a much more thorough, comprehensive picture of a company's financial health. Net working capital is calculated by taking a company's total current assets and subtracting any current liabilities. Current liabilities include accounts payable, short-term debt, taxes, and employee salaries. If a company takes out a short-term loan in the amount of $50,000, its net working capital won't increase, because while it is adding $50,000 in assets, it is also adding $50,000 in liabilities.

Difference between Operating Working Capital and Net Working Capital

Operating working capital is the measure of all long term assets versus all long term liabilities. The formula for calculating operating working capital is: OWC = (Assets - Cash and Securities) - (Liabilities - Non-interest liabilities). If interest is not charged on a debt, it is subtracted from the total liabilities. Securities are investment products that are subtracted from assets, as their value is speculative and not definite. A negative operating working capital is a sign the company may need to adjust its strategy.

Net Working Capital

Net working capital is different from operating working capital. Net working capital focuses more on the now, rather than the long term. The formula for calculating net working capital is: NWC = total assets - total liabilities. Unlike operating working capital, you do not need to remove cash, securities or non-interest liabilities. This shows the current liquidity of a company for the coming quarter. A company that has a negative net working capital may need to raise capital to continue operations.