Home Business Accounting Net Operating Working Capital (What It Is And How To Calculate It)

Net Operating Working Capital (What It Is And How To Calculate It)

What is Net Operating Working Capital?

How do you calculate the net operating working capital?

What should you know?

Keep reading as we have gathered exactly the information that you need!

Let’s dig into our finance, accounting, and financial formula knowledge!

Are you ready?

Let’s get started!

What Is Net Operating Working Capital

The “net operating working capital” or NOWC is the value in excess of a company’s operating current assets over the operating current liabilities.

Operating current assets are

(Cash + Account Receivables + Inventories) – (Accounts Payable + Accrued Expenses)
Author

Operating liabilities are commitments that are required to be settled within twelve months but exclude loans and interest-bearing debt obligations.

With the net “operating” working capital, the objective is to get a measure of the cash flow available to a company from its operations.

The objective of the “net operating” working capital is to measure how efficiently a company uses its resources to operate its business.

This measure is closely related to the Net Working Capital (NWC) but not the same.

The net working capital provides a calculation of how a company uses all its current assets and current liabilities whereas the net operating “working capital” looks at balance seet accounts such as:

  • Cash 
  • Accounts receivable 
  • Inventory
  • Accounts payable 
  • Accrued expenses

Net Operating Working Capital Formula

How to calculate net operating working capital?

You can calculate the NOWC by using the following formula:

NOWC = COA – COL
Author

Where:

  • COA = Current Operating Assets
  • COL = Current Operating Liabilities 

This formula measures a company’s operating assets compared to its operating liabilities.

If the operating assets are sufficient to pay for the company’s operating liabilities, the result of this calculation will be positive.

The net operating capital formula is an important one as it provides a measure of how a company uses its resources in its operations.

Net Operating Working Capital vs Net Working Capital

Net Working Capital (NWC) is not the same thing as the Net Operating Working Capital (NOWC).

In essence, the net working capital is the current assets less the current liabilities as depicted by the following formula:

Net Working Capital = Current Assets – Current Liabilities
Author

On the other hand, net operating working capital is more focused on the operating cash flow depicted by the following formula:

Net Operating Working Capital = Current Operating Assets – Current Operating Liabilities 
Author

Net Operating Working Capital vs Total Operating Capital 

What is the difference between net operating working capital and the total operating capital?

In essence, the NOWC is part of the TOC.

To calculate total operating capital, you need to take the NOWC and add the company’s fixed assets.

In the net operating working capital, you have:

  • Cash account 
  • Accounts receivable account
  • Inventory account
  • Accounts payable account 
  • Accrued expenses account 

To get the total operating capital, you’ll need to add the fixed assets such as:

  • Equipment
  • Machinery 
  • Vehicles
  • Office furniture
  • Buildings
  • Land
  • Other fixed assets

The TOC provides a company, investor, accountant, or anyone assessing a company’s financial position with a broader picture.

NOWC Example

Let’s look at a NOWC example to better illustrate how to calculate net operating working capital.

Let’s assume the following parameters for a company found in its income statement:

  • Cash: $100,000
  • Accounts Receivables: $75,000
  • Inventory: $500,000
  • Accounts Payable: $250,000
  • Accrued Expenses: $150,000

With this information, you can calculate NOWC by doing the following net operating capital calculation:

  • Current Operating Assets = $100,000 (Cash) + $75,000 (AR) + $500,000 (Inventory) = $675,000
  • Current Operating Liabilities = $250,000 (AP) + $150,000 (AE) = $400,000

Therefore, NOWC is $675,000 – $400,000 = $275,000

This means that the company has $275,000 over and above what it needs to fully pay off its operating expenses.

In this example, this financial measure alone may suggest that the company is in good financial health (but NOWC alone does not tell the full story).

Net Operating Capital Takeaways 

So what is the financial definition of Net Operating Working Capital?

How to find net operating working capital?

Let’s look at a summary of our findings.

Net Operating Working Capital Definition

  • You can define net operating working capital (or NOWC) as a financial measure (or ratio) of a company’s ability to assume its operating liabilities using its operational assets
  • The formula for NOWC is to add cash, account receivable, and inventory to one another and deduct from that account payable and accrued expenses
  • To calculate the NOWC is to directly calculate a company’s liquidity and operational efficiency with a short-term view 
  • The net operating working capital measures the difference between non-interest bearing operating assets and non-interest bearing operating liabilities 
Balance sheet
Capital account
Current assets
Current income 
Economic profit 
Income statement 
Market value added 
Net assets 
Net income 
Net working capital
Pro forma financial statement 
Residual income
Author
Cash ratio 
Cost of goods sold
Current ratio 
EBITDA
Expense ratio 
Financial break-even point 
Free cash flow 
Gross working capital 
Non-cash working capital
Tobin’s q
Total leverage 
Working capital turnover ratio
Author

Editorial Staff
Hello Nation! I'm a lawyer by trade and an entrepreneur by spirit. I'm passionate about law, business, marketing and technology. On this blog, I share my experiences, provide you with golden nuggets of information about business, law, marketing and technology. Enjoy!

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