Net Working Capital

As shown in Figure 2.1, the difference between a firm's current assets and its current liabilities is called net working capital. Net working capital is positive when current assets exceed current liabilities. Based on the definitions of current assets and current liabilities, this means that the cash that will become available over the next 12 months exceeds the cash that must be paid over that same period. For this reason, net working capital is usually positive in a healthy firm.

net working capital

Current assets less current liabilities.

Building the Balance Sheet

A firm has current assets of $100, net fixed assets of $500, short-term debt of $70, and long-term debt of $200. What does the balance sheet look like? What is shareholders' equity? What is net working capital?

In this case, total assets are $100 + 500 = $600 and total liabilities are $70 + 200 = $270, so shareholders' equity is the difference: $600 - 270 = $330. The balance sheet would thus look like:

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