Net Operating Working Capital (NOWC) | Formula | Example

Net Operating Working Capital

• Net operating working capital (NOWC) is the excess of operating current assets over operating current liabilities. In most cases it equals cash plus accounts receivable plus inventories minus accounts payable minus accrued expenses.

Operating current assets are assets that are (a) needed to support the business operations, and (b) expected to be converted to cash in next 12 months. They do not include current financial investments.

Operating current liabilities are liabilities that are (a) undertaken to carry out the business operations, and (b) expected to be settled in next 12 months. They exclude any current loans or interest bearing liabilities.

Net operating working capital is different from (net) working capital which simply equals current assets minus current liabilities. NOWC is an intermediate input in the calculation of free cash flow. Free cash flow equals operating cash flow minus gross investment in operating assets minus investment in net working capital.

Formula

Net Operating Working Capital
= Current Operating Assets
− Current Operating Liabilities

In many cases, the following formula can be used to calculate NOWC:

Net Operating Working Capital
= (Cash + Accounts Receivable + Inventories)
− (Accounts Payable + Accrued Expenses)

Example

Let us calculate net operating working capital for IBM (NYSE: IBM) for financial year 2012.

	Total	Operating	Non-operating
CURRENT ASSETS
Cash and cash equivalents	10,412	10,412
Marketable securities	717	—	717
Notes and accounts receivable-trade	10,667	10,667
Short-term financing receivables	18,038	—	18,038
Other accounts receivable	1,873	1,873
Inventories	2,287	2,287
Deferred taxes	1,415	1,415
Prepaid expenses and other current assets	4,024	4,024
Subtotal	49,433	30,678	18,755
CURRENT LIABILITIES
Taxes	4,948	4,948
Short-term debt	9,181	—	9,181
Accounts payable	7,952	7,952
Compensation and benefits	4,745	4,745
Deferred income	11,952	11,952
Other accrued expenses and liabilities	4,847	4,847
Subtotal	43,625	34,444	9,181

Net Working Capital
= Current Assets − Current Liabilities
= $49,433M − $43,625M
= $5,808 million

Net Operating Working Capital
= Operating Current Assets − Operating Current Liabilities
= $30,678M − $34,444M
= -$3,766 million

Low working capital and low net operating working capital together with unfavorable current ratio, quick ratio, days sales in receivable and days sales in inventory indicate liquidity problems.

by Obaidullah Jan, ACA, CFA and last modified onJul 25, 2013