Working capital and funding requirements: calculations and Swiss example

How do you calculate net working capital?

For a balance sheet classified by maturity, there are two equivalent calculations:

Current assets − current liabilities

Or:

Equity + non-current liabilities − non-current assets

The second formula explains the funding logic: some long-term resources remain to support current needs after non-current assets have been financed. The first calculates the same amount directly from current balance sheet items.

Use consistent values and classifications. Loan repayments falling due in the short term belong in current liabilities. A shareholder loan is not automatically long-term just because the lender owns the company; its terms matter.

Our explanation of the Swiss balance sheet covers the relevant items. Some analyses require additional adjustments, so define the measure before comparing calculations.

What does the working capital requirement represent?

The requirement arises from the timing gap between committing resources to operations and receiving the related payments. You may buy or produce goods before selling them, then wait for your customer to pay. Supplier credit and customer advances finance part of that cycle.

A simplified formula is inventory + trade receivables − trade payables. A fuller analysis includes other relevant operating assets and liabilities, such as work in progress, prepayments, social insurance and tax liabilities, or customer advances, according to the scope chosen.

The requirement is not the difference between “required working capital” and “actual working capital”. It is calculated from the items that make up the operating cycle.

A service company can have a substantial requirement without holding any inventory. It pays salaries while completing an assignment, then waits for collection. Conversely, a retailer paid immediately by customers may fund part of its activity through supplier payment terms.

Worked example using a Swiss franc balance sheet

The simplified balance sheet below uses carrying amounts for receivables and liabilities. Other operating liabilities include the items needed to maintain a consistent scope. Complex transactions are excluded.

Current assets total CHF 120,000 and current liabilities CHF 90,000. Net working capital is CHF 30,000.

The alternative calculation gives the same result: CHF 70,000 + CHF 40,000 − CHF 80,000 = CHF 30,000.

The operating working capital requirement is CHF 40,000 + CHF 60,000 − CHF 50,000 − CHF 30,000 = CHF 20,000.

Net cash is therefore CHF 30,000 − CHF 20,000 = CHF 10,000. This reconciles to cash less short-term bank borrowing: CHF 20,000 − CHF 10,000 = CHF 10,000.

The company does not have CHF 30,000 in freely available cash just because its net working capital reaches that amount. Part of those resources already finances operations.

How should positive and negative amounts be interpreted?

Positive net working capital indicates that long-term funding covers non-current assets and part of current needs. It does not establish that receivables will be collected or inventory sold at its expected value.

Negative net working capital means some long-term assets are financed with short-term resources. This can create refinancing pressure. Interpretation depends on the business model, the stability of funding and repayment dates.

A positive operating working capital requirement is common: it represents a need to be financed. A negative requirement can arise when customers pay quickly and suppliers allow longer terms. It is not automatically favourable: accumulating overdue supplier invoices can also make it negative.

Look at trends and the causes of changes. A year-end figure may conceal a seasonal funding peak several months earlier. Our article on cash flow management explains how to anticipate those low points.

What can improve your financial balance?

To reduce the operating requirement, focus on timing: invoice sooner, follow up unpaid invoices, agree customer advances and keep stock levels proportionate to demand. Inventory checks help identify slow-moving products and goods that have become difficult to sell.

Negotiate supplier terms without turning late payment into a financing strategy. Suppose a supplier in our example requires CHF 10,000 earlier and the business pays it. Cash and trade payables both fall by CHF 10,000. Net working capital remains unchanged, but the operating requirement rises by CHF 10,000 and net cash falls to zero.

To strengthen net working capital, a company can examine additional long-term resources, retaining earnings in the business or adjusting its investment plans. Funding should match the duration of the need and the company’s repayment capacity.

A profitable new order can increase funding needs before generating cash. Calculate the cost of production and the collection delay before accepting it.

Monitor working capital consistently

Calculate the figures monthly or quarterly, according to your activity, using the same categories. Compare them with sales volumes and seasonal patterns, not only with the previous year’s amount.

For receivables ratios, use a consistent basis: receivables including VAT should be compared with sales including the corresponding VAT, or both should be adjusted comparably. Analyse inventory against cost, not selling price. Mixing bases produces misleading collection or holding periods.

Connect changes in the operating working capital requirement to the cash flow statement. An increase generally absorbs cash, all else being equal; it is not an additional income statement expense.

Frequently asked questions