Definition: Net operating working capital (NOWC) is a financial metric that measures a company’s operating liquidity by comparing operating assets to operating liabilities.
What Does Net Operating Working Capital Mean?
What is the definition of NOWC? The ratio measures a company’s ability to pay off all of its working liabilities with its operational assets. This is an important metric because it shows the leverage of the company and the amount of current, working assets.
It also shows how a company operates using its resources and how it efficiently the company can adapt to unexpected events and new opportunities. This is evident in equation itself.
The net operating working capital formula is calculated by subtracting working liabilities from working assets like this:
Cash + Accounts Receivable + Inventory – Accounts Payable + Accrued Expenses
This metric is much more tied to cash flows than the net working capital calculation is because NWC includes all current assets and current liabilities. Because of this, NOWC is often used to calculate free cash flow.
Let’s look at an example.
Example
Let’s assume Bill’s Machining has the following assets on its balance sheet.
- Cash: $100,000
- Accounts Receivable: $20,000
- Inventory: $500,000
- Accounts Payable: $300,000
- Accrued Expenses: $100,000
Bill would calculate his NOWC as follows:
$100,000 + $20,000 + $500,000 – $300,000 – $100,000 = $220,000
This means that Bill could pay off all of his working liabilities with only a portion of his working assets. Thus, if his vendors or creditors called all of his debts at the same time, he would be able to pay them off and still have a good amount of this working assets left to run the business.
This is a sign of health and liquidity in Bill’s business. It’s also a sign of low risk for creditors and investors.
Summary Definition
Define Net Operating Working Capital: NOWC means a financial ratio that measures a company’s ability to pay off its operational liabilities with its operational assets.
