Net Working Capital (NWC)

NWC is an indicator of a company’s operating efficiency and financial strength.

NWC = Accounts Receivable + Inventory - Accounts Payable

It can also be defined as

NWC = Current Assets - Current Liabilities

Reducing NWC improves shareholder profitability because a high level of NWC can be a sign of inefficient operations.

NWC is directly related to a company's cash flows as good working capital management leads to reliable and predictable conversion of operating profits into free cash flow.

Growing NWC might lead to less business growth and higher financing costs.

Thus, reducing NWC is the cheapest source of cash.

An example: Amazon's focus on selling books and time to repay invoices on inventory led them to exploit the long credit terms that purchasing book inventory has. The books can be delivered and sold quickly, allowing them to free up cash to expand their business.