# 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.

TotalOperatingNon-operating
CURRENT ASSETS
Cash and cash equivalents10,41210,412
Marketable securities717717
Notes and accounts receivable-trade10,66710,667
Short-term financing receivables18,03818,038
Other accounts receivable1,8731,873
Inventories2,2872,287
Deferred taxes1,4151,415
Prepaid expenses and other current assets4,0244,024
Subtotal49,43330,67818,755
CURRENT LIABILITIES
Taxes4,9484,948
Short-term debt9,1819,181
Accounts payable7,9527,952
Compensation and benefits4,7454,745
Deferred income11,95211,952
Other accrued expenses and liabilities4,8474,847
Subtotal43,62534,4449,181

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 on

#### Related Topics

XPLAIND.com is a free educational website; of students, by students, and for students. You are welcome to learn a range of topics from accounting, economics, finance and more. We hope you like the work that has been done, and if you have any suggestions, your feedback is highly valuable. Let's connect!