Net Operating Working Capital Calculator
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What is net operating working capital?How to calculate the net operating working capitalFAQsWith this net operating working capital calculator, we aim to help you measure a company's liquidity. You can use our quick ratio calculator and current ratio calculator to understand more about the liquidity of a company.
We have written this article to help you understand what the net operating working capital is and how to calculate the net operating working capital using the NOWC formula. We will also demonstrate some examples to help you understand the calculation.
What is net operating working capital?
Net Operating Working Capital (NOWC) is a financial metric that measures a company's short-term liquidity by subtracting its current operating liabilities from its current operating assets. You can use our working capital calculator to understand more about this topic.
NOWC is important because it provides insight into a company's ability to meet its short-term operating expenses. A positive NOWC indicates that a company has enough liquid assets to meet its short-term liabilities. In contrast, a negative NOWC indicates that a company may struggle to meet its short-term obligations.
How to calculate the net operating working capital
To understand how to calculate the NOWC calculation, let's take Company Alpha as an example:
- Cash: $1,000
- Accounts receivables: $15,000
- Inventories: $5,000
- Accounts payable: $18,000
- Accrued expenses: $2,000
You can calculate net operating working capital in three steps:
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Determine the current operating assets
First, you need to calculate the current operating assets of the company, which include cash and accounts receivable.
current operating assets = cash + accounts receivables + inventoriesHence, Company Alpha's
current operating assetsis$1,000 + $15,000 + $5,000 = $21,000. -
Compute the current operating liabilities
Second, you need to calculate the current operating liabilities of the company, which include accounts payable and accrued expenses.
current operating liabilities = accounts payable + accrued expensesThe
current operating liabilitiesof Company Alpha will be$18,000 + $2,000 = $20,000. -
Calculate the NOWC by using the net operating working capital formula
The final step is to calculate the NOWC by applying the net operating working capital formula:
NOWC = current operating assets - current operating liabilitiesThus, the
NOWCfor Company Alpha will be$21,000 - $20,000 = $1,000.
Can the net operating working capital be negative?
Yes, negative NOWC is possible and indicates that a company's non-interest-bearing current liabilities exceed its current assets, which may suggest short-term financial difficulties.
How can I calculate the net operating working capital?
You can calculate net operating working capital in three steps:
-
Determine the current operating assets.
-
Compute the current operating liabilities.
-
Apply the net operating working capital formula:
NOWC = current operating assets - current operating liabilities.
What is the difference between working capital and net operating working capital?
Working capital includes cash and interest-bearing debt, while net operating working capital excludes these items and provides a more accurate measure of a company's short-term liquidity.
Why is NOWC more important than working capital for evaluating a company's short-term liquidity?
NOWC provides a more accurate picture of a company's liquidity because it excludes cash and interest-bearing debt, which are not used to fund a company's operations.
What is the NOWC for $1,000 net operating assets and $700 net operating liabilities?
The net operating working capital (NOWC) will be $300. You can calculate this by subtracting the net operating liabilities from the net operating assets.