Year-over-year change in operating current assets minus current liabilities.
change_in_nwcAlso: ΔNWCChange 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.
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).
Current year NWC minus prior year NWC.
= ΔAR + ΔInventory - ΔAP - ΔAccrued_LiabilitiesBuilding from individual line items
= (DSO_t × Rev_t/365 + DIO_t × COGS_t/365 - DPO_t × COGS_t/365) - NWC_t-1Using days metrics for forecast
Model NWC using days metrics (DSO, DIO, DPO) for transparency. Growing revenue typically requires working capital investment. At steady state, NWC change approaches zero.
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.
Think of NWC as the operating cycle: days to sell inventory + days to collect from customers - days to pay suppliers. Lower is better.
Model NWC using days metrics rather than percentage of revenue. This gives you more control and helps identify operational improvement assumptions.
This variable is a key driver in the following financial models: