Cash Flow
What Is Net Working Capital (NWC)?
Net working capital (NWC) is accounts receivable plus inventory minus accounts payable. It strips out cash and short-term debt to isolate the operational capital your business ties up day-to-day. In M&A, NWC sets the purchase price adjustment: deliver above or below the agreed target at close and the deal price moves dollar for dollar.
Net Working Capital (NWC) is the operational portion of working capital, AR plus inventory minus AP. It excludes cash and short-term debt, which makes it the right measure for comparing operating efficiency across periods and the standard concept in M&A negotiations.
How NWC is calculated
NWC = Accounts Receivable + Inventory − Accounts Payable
Excludes: cash on hand (financing decision), short-term debt (financing decision), prepaid taxes, deferred revenue (varies by accounting policy).
Example
A DTC brand: $300K AR + $2.4M inventory − $900K AP = $1.8M NWC. If the trailing 12-month average is also $1.8M, that's the M&A working capital target. If at close NWC is $2.1M, purchase price adjusts up by $300K; if it's $1.5M, down by $300K.
What's a normal NWC?
Highly business-specific. Track as % of revenue:
- Low-NWC DTC (subscription, fast turn): 510% of annual revenue
- Typical DTC: 1222% of annual revenue
- Heavy-inventory DTC (apparel, outdoor): 2540% of annual revenue
For working capital efficiency benchmarks see working capital efficiency public DTC.
The most common mistake
Sellers don't track NWC monthly until M&A is on the table. Then the QofE team rebuilds 24 months of trailing NWC and surfaces seasonal patterns the seller can't explain. Track NWC monthly from day one, it's the cleanest M&A-readiness signal.
Frequently Asked Questions
how is NWC different from working capital?
NWC excludes cash and short-term debt, focuses on operational working capital only.
why does NWC matter in M&A?
Locks in a normal operating level so sellers can't pump cash by draining inventory or stretching AP pre-close. Variance from target adjusts purchase price dollar-for-dollar.
how is the NWC target set?
Typically trailing 12-month average, sometimes seasonality-adjusted.
Related Terms
- What is working capital?
- What is working capital true-up?
- What is Quality of Earnings?
- What is cash conversion cycle?
Browse the full ecommerce finance glossary for every metric and money term a DTC operator needs.
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