An acronym for net working capital; the difference between an entity’s current assets (e.g., cash, accounts receivable, and inventories of raw materials and finished goods) and its current liabilities (such as accounts payable and other types of debts).

NWC = gross working capital – current liabilities

Gross working capital (GWC) represents the amounts of money internally invested by an entity in different venues including cash, accounts receivable, inventory, and other current assets.

Net working capital, or simply working capital, finances the so-called cash conversion cycle of a business- that is, the amount of time needed to convert inputs (raw materials and other inputs) into finished goods, finished goods into sales, and accounts receivable into cash.

The investment decision relates to both long-term investment in non-current assets and short-term investment in working capital. Management of working capital involves management of liquidity in a way to ensure that inventory is maintained at a level corresponding to actual requirements for efficient production, receivables and debts are collected on time, cash balances (idle funds) are invested at the best rates, and payables are paid and settled on a timely basis.

Working capital is built up using internal and external sources. Internal sources include retained earnings, savings resulting from operational efficiencies and allocations of certain items such as depreciation or deferred taxes, etc. External sources of working capital include short-term funding such as bank loans, trade credit, and term debt and equity financing assigned to short-term assets.