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Change in Net Working Capital

Year-over-year change in operating current assets minus current liabilities.

change_in_nwcAlso: ΔNWC

Definition

Change in Net Working Capital represents the incremental cash investment (or release) in short-term operating assets and liabilities. An increase in NWC represents a use of cash, while a decrease represents a source of cash.

Why It Matters

NWC investment is a significant driver of free cash flow, especially for growing companies. It represents the cash tied up in operating the business (inventory, receivables) net of short-term financing (payables).

Formula

= NWC_t - NWC_t-1

Current year NWC minus prior year NWC.

Mathematical Notation
\Delta NWC = NWC_t - NWC_{t-1}

Alternative Approaches

Components= ΔAR + ΔInventory - ΔAP - ΔAccrued_Liabilities

Building from individual line items

Days-based= (DSO_t × Rev_t/365 + DIO_t × COGS_t/365 - DPO_t × COGS_t/365) - NWC_t-1

Using days metrics for forecast

Typical Ranges

Best Practices

Model NWC using days metrics (DSO, DIO, DPO) for transparency. Growing revenue typically requires working capital investment. At steady state, NWC change approaches zero.

Common Mistakes

  • Forgetting to include change in NWC in FCF
  • Sign errors (increase in NWC is cash use)
  • Inconsistent NWC definition across periods
  • Not linking NWC to revenue growth

Pro Tips

  • NWC as % of revenue is a key assumption check
  • Negative working capital businesses (like Amazon) can grow without NWC investment
  • Watch for unusual NWC releases in historical periods

Dependencies

Affects (Variables that depend on this)

Audit & Governance

Risk Level
Medium
Approval Required
analyst
Sensitivity
internal
Track Changes
Yes

Learning Path

beginner

Working capital is the cash "trapped" in running the business day to day. When you sell more, you typically need more inventory and wait longer for customers to pay, which uses cash.

intermediate

Think of NWC as the operating cycle: days to sell inventory + days to collect from customers - days to pay suppliers. Lower is better.

advanced

Model NWC using days metrics rather than percentage of revenue. This gives you more control and helps identify operational improvement assumptions.

Used in Models

This variable is a key driver in the following financial models: