What is Net Working Capital?

For small Indian businesses, balancing daily finances can be a delicate act and one of the most valuable financial tools to navigate this is Net Working Capital (NWC). It indicates whether your business possesses sufficient short-term assets to cover its short-term liabilities. Carefully measured, NWC turns into a liquidity indicator, an indicator of business stability and corporate financial well-being. For a Micro, Small and Medium Enterprise (MSME), mastering the calculation and optimisation of NWC can be the key difference between success and financial hardship.

Understanding Net Working Capital

Net Working Capital is the difference between current assets and current liabilities. Businesses often use the terms “working capital” and “net working capital” interchangeably, but the definition remains the same.

A positive NWC means a company can cover its bills and still have money left to reinvest. A negative NWC may point to potential cash flow issues. For Indian MSMEs, this metric becomes an essential measure of liquidity and ensures that funds are available for operations, expansion and supplier payments.

Net Working Capital Formula and How to Calculate It?

Now that you have understood what net working capital is, let us look at the formula.

The net working capital formula is simple:

Net Working Capital = Current Assets – Current Liabilities

• Current Assets are resources expected to convert into cash within one year.
• Current Liabilities are obligations due within the same period.

Imagine an MSME in Maharashtra with current assets worth INR 20,00,000 (including inventory, cash and receivables) and current liabilities of INR 15,00,000 (loans, vendor payments and taxes).

NWC = 20,00,000 – 15,00,000 = INR 5,00,000

This positive NWC reflects surplus liquidity, meaning the business can meet its financial commitments and still retain funds to expand operations.

Also Read: Difference Between Fixed Capital and Working Capital

Components of Current Assets

For a small Indian business, current assets may include:

• Cash and bank balances: Funds kept for immediate needs.
• Accounts receivable: Money due from clients for goods sold or services delivered.
• Inventory: Raw materials, work-in-progress and finished goods.
• Marketable securities: Short-term investments.
• Prepaid expenses: Rent or insurance paid in advance.

Components of Current Liabilities

Common short-term liabilities for MSMEs include:

• Short-term borrowings from banks or NBFC such as Godrej Capital
• Accounts payable or dues to vendors.
• Accrued expenses such as wages payable.
• Taxes payable to authorities.
• Current portion of long-term debt due within a year.

Managing these components with care helps maintain a healthy working capital cycle.

Types of Net Working Capital

Net Working Capital can be understood in two ways:

Based on the Balance Sheet

• Gross Working Capital: Total of current assets.
• Net Working Capital: Current assets minus current liabilities.

Based on Operating Cycle

• Permanent Working Capital: The minimum level of current assets a company must always keep.
• Temporary Working Capital: Additional working capital needed during peak seasons or specific projects.

This classification of types of net working capital helps Indian SMEs plan for both steady and seasonal requirements.

Also Read: Types of Working Capital

Why is Net Working Capital Important?

NWC is a measure of liquidity strength in a company. It determines cash flow, the capacity to borrow money and the capacity to invest in expansion.

• Positive NWC: Sufficient assets to satisfy short-term debt. Smooth expansion of business.
• Negative NWC: Risk of payment delays or dependence on borrowings.
• Zero NWC: Break-even point, when assets only equal liabilities.

For small businesses, a positive NWC consistently indicates confidence when negotiating with suppliers, approaching Godrej Capital and planning for expansion.

How Can Small Businesses in India Use Net Working Capital?

MSMEs can use insights from their NWC calculation in multiple ways:

• Improve receivables collection by following up on overdue bills.
• Optimise inventory so funds are not locked in excess stock.
• Negotiate vendor terms to allow slightly longer repayment windows.
• Shorten billing cycles through digital invoicing.
• Use supplier credit strategically without over-dependence.

When used effectively, working capital managementallows businesses to maintain smooth cash flow throughout the year.

How to Improve Net Working Capital?

Here are practical methods for Indian businesses to strengthen NWC:

• Cash flow monitoring: Track inflows and outflows regularly.
• Supplier negotiations: Secure longer credit timelines.
• Expense trimming: Cut unnecessary operating costs.
• Accelerate receivables: Encourage early payments from clients.
• Inventory control: Adopt just-in-time practices to reduce holding costs.

To model your EMI and plan repayments better, you can also use the business loan EMI Calculator, a simple online tool.

To customise your EMI and do repayments better, you can use Business Loan EMI Calculator, that will help you arrive at the EMI aligning your financial goals.

Net Working Capital Analysis and Forecasting in Financial Modelling

NWC forecasting is crucial in business planning. It entails forecasting future current liabilities and assets, inputting them into Excel or financial software and then determining whether sufficient cash will be present.

For example, a textile SME might project future receivables, future vendor dues and potential seasonal costs. By projecting NWC, it makes sure that no unexpected liquidity shortfalls emerge in the growth process.

Final Thoughts

Net Working Capital is more than an equation. It is a true measure of whether a company can fund daily operations while laying the groundwork for future prospects. For Indian MSMEs, NWC managed well means stability, growth, and resilience in challenging markets. With careful planning, transparent financial management, and support through a Business Loan from Godrej Capital, your liquidity issues can turn into growth opportunities - apply for a loan today and take control of your business finances.

Apply now for a Business Loan

FAQs

Q.1. What happens if a company has negative net working capital?

A. Negative NWC indicates liabilities exceed assets. Although it is alarming for cash flow tension, some big companies with solid cash flows coming in will continue to perform well. For SMEs, though, consistent negative NWC can lead to financial pressures.

Q.2. How is net working capital different from gross working capital?

A. Gross Working Capital deals with only the total current assets, whereas Net Working Capital considers both the current assets and current liabilities.

Q.3. Can net working capital be negative and the business still be healthy?

A. Net working capital can be negative, but usually only for larger businesses with quick customer payments. For MSMEs, long-term negative NWC may make it difficult to pay vendors and staff on time.

Q.4. How often should a company calculate net working capital?

A. It is advisable to monitor NWC monthly or quarterly, depending on the size and complexity of the business.

Q.5. Does net working capital include cash?

A. Cash and bank balances are a significant component of current assets and are always considered in the NWC computation.

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