Net Operating Capital and its Importance in Business

net operating capitalNet operating working capital – or NOWC – is represented by a number. It is calculated by taking the current assets that are necessary to run your business and removing any non-interest bearing liabilities. The derived number helps assess a company’s liquidity as represented by its current assets and liabilities only.

The net operating working capital figure tends to include current assets such as cash, accounts receivable, and inventories. It removes marketable securities from the equation. Current liabilities will include accounts payable and accruals. However short term debt will be excluded. For a better handle on how net operating working capital is deduced and applied, take Udemy’s Course on accounting and understanding business.

Always a Formula

It is important to remember that net operating working capital is an intermediate value to calculate the cash flow of a company. Like other elements of accounting finance it will be represented as a formula.

Most often it will appear like this: current operating assets – current operating liabilities. However a more in depth version of the equation would be: (Cash + accounts receivable + inventories) – (accounts payable + accrued expenses).

The Focus is on Current 

Net operating capital is focused on current assets that can create revenue in the short term. This means that in a year or less a particular asset can be turned into cash. Working capital overall has to be current because it is used for daily operation and life of the business.

A Useful Tool

Considering the complexity of many financial documents, staying in the black can be tricky. The reason for calculating your net operating working capital is that it gives you a clear picture of where your company is in terms of stability. When you look at the resulting figure you might see that your current assets are greater than your liabilities. Because you have identified a surplus you can be in a position to diversify or reinvest. However, if the opposite is revealed and your liabilities are greater than your assets, you will need to make arrangements and begin planning to avoid the possibility of trending towards bankruptcy. Taking Udemy’s financial accounting course can help you navigate these decisions.

Another benefit of establishing your net operating working capital is that it will allow you to judge the daily productivity of your company. The amount of liquid capital a company has allows it a level of freedom. If a company is over invested in non current assets then money might not be available in a time of emergency. By calculating this number you will be able to gauge if this will be a problem for you or not.

In Relation to the OWC, as a Ratio

While determining the net operating working capital, it is a good time to also determine your operating working capital ratio. It is written as: current assets / current liabilities. Just like a statement of financial position, you want your OWC ratio to balance. It will not be perfectly 1 to 1, but somewhere between 1.2 and 2.

Company Acquisitions

Net operating working capital is often figured as part of an acquisition or merger deal between companies. It is often calculated as part of due diligence. If a company is up for sale it is expected the buyers will be interested in seeing, through numerical representation, the target company’s net working capital. They will want to understand how much money will be needed to sustain the income and cash flow that is used to determine the value of the business as a whole. If you are ready to get a handle on your business planning and management check out Udemy’s course on financial modeling. It will give you the tools necessary to understand net operating working capital when you begin planning your next big move.

When you calculate your net operating working capital you are taking steps to better understand your company and what it is capable of on a financial day-to-day basis. You can even figure out if your operating capital is right for your business growth.

When working with these types of financial equations and numbers it is best to work with the most up-to-date software. It is strongly advised that you take Udemy’s course for learning Quickbooks 2014. This will help you to get the most out of the program. With the right software, kno- how, and a strong understanding of your net operating working capital your business will have room to boom.