It is calculated using balance sheet items and shows how much capital a company has available for its day-to-day operations after short-term liabilities have been settled.
🔎 In this article, you’ll learn:
what net working capital is,
how it is calculated,
what it is used for, and
which typical interview questions are asked about it.
Working capital is the difference between a company's current assets and its current liabilities as per the balance sheet. Current assets are resources that can be converted into cash within one year, such as cash and cash equivalents, accounts receivable, inventory, prepaid expenses, and marketable securities. On the other hand, current liabilities are obligations the company must settle within the same period, including accounts payable, short-term debt, accrued expenses, wages, and taxes.
How is Working Capital Calculated?
Working capital is calculated using the formula:
Both current assets and liabilities are available on a company’s balance sheet. Finance professionals also calculate other metrics related to working capital such as working capital ratio and net working capital.
Net Working Capital (NWC) = (Current Assets - Cash) - (Current Liabilities - Debt)
Working Capital Ratio: Current Assets / Current Liabilities
What Does Working Capital Tell You About a Company?
The primary goal of working capital calculations is to assess a company's short-term financial health and liquidity. It paints a clear picture of the firm's ability to cover its short-term obligations using its current assets like cash, receivables, and inventory.
Generally, a positive working capital shows the company can meet its immediate obligations like payroll, suppliers, and rent without raising external capital. Negative working capital may signal potential cash issues, though context matters. For instance, capital intensive businesses like manufacturing typically need substantial working capital for inventory and receivables. Others like subscription services often use a negative working capital model where they collect cash from customers before paying suppliers.
Working capital also indicates:
Operational Efficiency: High working capital might mean excess inventory, slow collections, or inefficient cash management. Low or optimal working capital suggests efficient operations including collecting receivables quickly, managing inventory tightly, and negotiating favorable payment terms with suppliers.
Growth Capacity: Adequate working capital allows companies to fund growth without immediate financing. Insufficient working capital constrains expansion even if the business is profitable.
Risk profile: Persistently negative, tight, or deteriorating working capital increases refinancing and supplier risk while excess idle working capital may imply underutilized resources.
Common Interview Questions About Working Capital
Here are a few sample interview questions about working capital to help you practice.
1. What does positive vs. negative working capital indicate?
Positive working capital means that a company's current assets exceed its current liabilities. That’s often a sign of good short-term financial health and the ability to cover immediate debts and invest in growth or operations.
Negative working capital means current liabilities are greater than current assets. It can signal liquidity challenges or a need to rely heavily on operational cash flow. However, in some industries with fast turnover or advance payments, negative working capital can actually imply efficient operations and improved cash flow.
So, you must assess the why behind the negative or positive result and consider the business model.
2. If inventory increases, what happens to working capital and cash flow?
Inventory is a current asset. So, an increase in inventory raises current assets and therefore increases working capital. The build up of inventory means more assets are tied up and not yet converted to cash. As a result, cash flow usually decreases because the company has spent cash acquiring or producing the additional inventory.
3. What do you understand by “the change in working capital”?
The change in working capital implies the difference in the amounts of current assets and current liabilities from one period to another. A positive change means the company has increased its net current assets, which might indicate building inventory, collecting more receivables, or paying down short-term liabilities.
A negative change means a reduction in net current assets, potentially due to selling inventory, collecting receivables faster, or taking on more short-term liabilities. Changes in working capital directly affect cash flow. For instance, an increase in working capital usually means a use of cash, while a decrease releases cash into the business.
Practice More Question Sets For Your Finance Interview
Your client tk Commodity Trade (tk ComT) is a global materials trader - they buy and sell raw materials. tk ComT had stable EBITDA margins in recent years. They consider expanding their target market and entering the Lithium (electric vehicle battery grade) trade, due to the current high demand for electric cars and Lithium-ion batteries. The client is concerned about minimizing the cash spending and about improving the payback period for this market-entry campaign, due to corporate cash policy.As a consultant, you are expected to calculate the size of the Lithium market and to assess the payback periods for an organic market entry (with own resources) as well as for the acquisition of an established company. Finally, the client expects a proposal about the best market entry strategy and potential opportunities and risks.
Your client is a D2C (direct to customer) online fashion business in a developing country. It is a new brand, launched about 2 years ago and founded by ex-investment bankers. Their brand focuses on trendy, edgy design that is less main-stream (versus big brands like H&M, Uniqlo, Zara etc) for adult men. While they have been growing fast, they want to understand how they can further improve their sales.
You are part of the Strategy & Operations team at Revolut.Revolut has had significant growth over the past couple of years, with customer base growing 20-30% per year. Our apps have also been highly rated in the various app stores - be it GooglePlay or on the Apple store.Revolut's current customer strategy is to segment customers based on their subscription tiers/plans. Standard: FreePlus: $3.99/mthPremium: $7.99/mthMetal: $14.99/mthUltra: Ultra $55/mthKey differentiation between the plans are in the pricing and features. Namely, the more expensive tiers like Metal and Ultra have additional features such as personalized and premium card design, free access to lifestyle apps (e.g. Financial Times, Class Pass etc), better FX rates and priority customer support.It's great that Revolut has been expanding rapidly, but we are starting to see some stresses on our existing operations and processes. One key area of concern is in customer service, our satisfaction scores have started to trend down and call center headcounts and costs have been increasing in recent years, but we are struggling to handle the load of incoming requests and tickets.You have been tasked to lead a project to solve this problem without ballooning costs.
Your client is a leading retail coffee chain. They are present in several countries globally and are a popular brand in most of the markets that they operate in, with several thousands stores in operation.A key focus of the company currently is diversity & inclusion. In their biggest market which is the US, 1 in 4 people have some sort of disability. One realization the client has had is that their retail stores are not as inclusive to individuals with disabilities. McKinsey has been brought on to help them design more inclusive spaces in their retail stores.
Your client is the Government of Indonesia, specifically a joint committee formed between a few key ministries including the Ministry of Marine Affairs & Fisheries, Ministry of Tourism and Ministry of Environment & Forestry. Indonesia is one of the largest developing countries in the world, with a population of about 285M people and an average monthly income of only USD 500. Located in Southeast Asia, Indonesia is actually a vast archipelago comprised of 17,000 islands, giving it one of the longest and most complex coastlines in the world. It is also part of the Coral Triangle, an area demarcated by scientists as the global epicenter of marine diversity. Your client tells you that Indonesia's once pristine coral reefs have seen a rapid decline over the past decade. They have come to you for help and want to figure out what is causing the problem.
Working capital equals current assets minus current liabilities. Current assets are items that can be converted into cash within a year, such as receivables, inventory, or marketable securities. Current liabilities are short-term obligations like accounts payable, accrued expenses, wages, taxes, and short-term debt.
Efficient working capital management appears in tight inventory control, fast receivable collection, and favorable payment terms with suppliers. Low or optimized working capital often signals that the company converts resources into cash quickly rather than letting capital sit idle.
Adequate working capital allows a business to fund expansion, new projects, and daily operations without relying on immediate external financing. If working capital is insufficient, growth may stall even when the business is profitable.
Persistently negative or shrinking working capital increases liquidity, refinancing, and supplier risk. In contrast, excessively high idle working capital can signal poor cash management and underutilized resources.
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