Net working capital (NWC)

Definition

NWC is not a profit number: it's a balance-sheet position. It measures how many "tied-up euros" your business needs to deliver today what gets collected tomorrow. Receivables are invoices issued but not yet paid. Inventory is product ready but not yet sold. Payables are purchases you still owe: these effectively finance your working capital, so they're subtracted.

In an M&A context NWC determines two things: (1) how much cash stays with the business at completion (the working-capital peg), and (2) how fast cash returns (cash-conversion-cycle = DSO + DIO − DPO). Businesses with negative NWC (customers pay upfront) carry a structural advantage; businesses with high NWC (long production cycles, long payment terms) carry working-capital financing as a material cost.

Worked example

A Brussels wholesaler: receivables €380k (DSO 55), inventory €420k (DIO 65), payables €310k (DPO 45). NWC = 380 + 420 − 310 = €490k. At €2.5m revenue NWC is ~20% of revenue and the cash cycle is 75 days: typical for traditional wholesale.

When it matters

In every M&A deal above €1m. The buyer checks whether you leave enough NWC at completion to operate without a cash injection; the SPA peg cash-settles deviations either way. Common seller mistake: optimising NWC just before closing (winding down inventory, accelerating receivables) triggers a retroactive price chip.

Frequently asked

What does NOT belong in NWC?

Cash, bank debt, financial leases, intercompany items, and one-off positions. These sit in the cash/debt/debt-like-items list separately.

What's a healthy NWC level?

Sector-dependent. Software/SaaS: 0% to negative (annual prepayments). Service businesses: 5-15%. Wholesale: 15-25%. Manufacturing: 20-30%. Significantly above these = inefficiency or structural issue.

How does NWC differ from working capital?

Gross working capital = receivables + inventory. Net working capital subtracts payables. M&A almost always uses "NWC": that's what the buyer economically takes over.