Avoid a Cash Crunch: Know Your Net Working Capital

Eric Weynand, Founder
Net Working Capital and Cash Runway by Month

Positive cash flow is vital for startups and small businesses. You don’t just need to pay your bills. You want to make sure you have capital leftover to reinvest and fuel growth. To maximize your company’s growth potential, you need to look beyond basic cash flow and understand net working capital.

What Is Net Working Capital?

Net working capital, or simply working capital, is a gauge of your company’s short-term financial health. It compares your current assets and liabilities to show your ability to cover your ongoing bills.

Ideally, your company has a positive net working capital. This means you have enough cash and assets to fund your business and pay off short-term debts, with money left over to reinvest. It’s a good sign for investors and banks, as it means you’re financially stable and have strong growth potential.

On the other hand, a negative net working capital means your short-term liabilities exceed your assets. You may have cash on hand, but your forecast shows that you’re going to end up in the red soon. Aside from the obvious cash crunch, this makes lenders skittish and can lead to a lack of credit options when you need them most. Negative working capital is an early warning sign that you need to improve your cash flow situation.

How to Calculate Net Working Capital in Your Business

Net working capital is a powerful tool for making smarter, more informed business decisions. And it’s easy to calculate using key figures from your balance sheet. Here’s the simple formula:

Net Working Capital = Current Assets – Current Liabilities

There are a few things to break down in that formula. First, “current” means a year or less in this context. This includes assets you can convert to cash in that time frame, and bills that will be due by then. Ignore any long-term debts or assets. 

Next, it’s important to understand which assets and liabilities to tally up. 

What Counts as Current Assets

When it comes to current assets, there are four major categories:

  • Cash and Equivalents – This is usually just cash on hand, but can also include short-term investments like money market funds or CDs
  • Accounts Receivable – Any outstanding payments due from clients
  • Inventory – If your business sells goods rather than services, you’ll need the total value of the inventory you’re holding
  • Marketable Securities – Any stocks that can be sold, barring any stock that’s locked up for longer than a year

What Counts as Current Liabilities

For short-term liabilities, you should include:

  • Accounts Payable – Any outstanding invoices from vendors that you haven’t paid yet
  • Outstanding Wages – Upcoming payroll and any guaranteed bonuses or commissions
  • Credit Cards – Count any outstanding credit card debt here, regardless of payment terms
  • Short-Term Loans – If a loan matures within one year, it counts as short-term debt—otherwise, you can ignore it
  • Accrued Expenses – This can mean anything from payroll and sales tax to interest costs (if you’re not sure what to include here, your accounting team can help you break it down to make sure you’re not missing anything)

Once you have these totals, finding your net working capital is as simple as subtracting your liabilities from your assets.

Net Working Capital and Cash Runway by Month
PlotPath calculates your Net Working Capital and Cash Runway so you avoid a cash crunch.

How PlotPath Helps You Maximize Your Net Working Capital

Net working capital is an important number, but its real value lies in understanding how to leverage it. This is where accounting software can sometimes leave business owners hanging. Tools like Quickbooks Online may give you a quick ratio of your money-in accounts vs money-out accounts. But it doesn’t actually calculate or track your net working capital. 

At PlotPath, we work with you to monitor net working capital—and understand what it means for your business. 

  • Our monthly reporting package tells you exactly how much money you have at your disposal—not just what’s in the bank today, but also accounting for near-term projected income and expenses
  • We combine your current bank balances, credit cards, accounts receivable, and accounts payable to give a clear cash flow picture and help you pinpoint challenges
  • We also calculate and track your business’ cash runway: a critical benchmark that determines how long your cash would last in a reduced or no new sales scenario

Tracking your net working capital on an ongoing basis helps you manage your short-term cash flow and look for pain points before they happen. Looking to get a better handle on your net working capital? PlotPath can help you manage your company’s financial health.