Net operating working capital refers to the difference between a company's current assets and its current liabilities, excluding short-term debt. It represents the amount of capital that is required to sustain a company's day-to-day operations. NOWC includes items such as cash, accounts receivable, inventory, and prepaid expenses, minus accounts payable, accrued expenses, and taxes payable.
Basically, the net operating working capital is a financial metric that helps measure a company's liquidity and its ability to meet short-term obligations without relying on additional external funding. It provides insight into a company's operational efficiency and helps assess its financial health.
To calculate net operating working capital, you must first determine the current assets and current liabilities of your company. Now what are current assets and current liabilities?
Well, current assets include cash, accounts receivable, and inventory, while current liabilities include accounts payable and short-term debt. Subtracting the current liabilities from the current assets will give you the net operating working capital.
This calculation is important as it helps measure the amount of capital needed to maintain everyday operations of a business. It can also indicate the efficiency and financial health of a company.