How to calculate increase in net working capital?

Calculating the increase in net working capital involves comparing current period working capital with the previous period, providing insights into business liquidity changes and cash flow requirements.

Net working capital is found by taking the value of current assets and deducting current liabilities from it. When net working capital goes up, it means the business needs to invest more money to keep operations running smoothly or to support growth—this often happens when sales are rising or the company is expanding. On the other hand, if net working capital decreases, it could mean the business is managing its resources more efficiently, or it might signal a slowdown in activity. In essence, an increase usually points to growth that needs extra funding, while a decrease may reflect either better use of resources or a reduction in business operations.

Calculation formula:

• Current period net working capital - Previous period net working capital = Increase
• Current assets (inventory + receivables + cash) - Current liabilities (payables + accruals)

Example calculation: If current year working capital is ₹15 lakhs and previous year was ₹10 lakhs, the increase is ₹5 lakhs. This indicates the business required an additional ₹5 lakhs investment to support operational growth.

Analyse individual components to understand increase drivers. Rising inventory levels may indicate business expansion or inefficient inventory management. Increasing receivables could suggest growing sales or collection challenges. Growing payables might reflect extended supplier terms or cash flow constraints.

Consider seasonal variations when calculating increases. Compare similar periods rather than consecutive quarters to account for cyclical business patterns. Normalise calculations for one-time events or extraordinary circumstances affecting working capital.

Use this metric for cash flow forecasting and financing planning. Projected working capital increases help determine future funding requirements for business expansion. Monitor trends over multiple periods to identify patterns and implement appropriate financial strategies supporting sustainable growth whilst maintaining adequate liquidity.