Differences Between Net Operating Working Capital (NOWC) and Total Operating Capital (TOC)
Companies use their financial statements to gauge their operational and financial health. The balance sheet provides owners, managers, lenders and investors with insights regarding leverage, profit reinvestments and asset quality. Two variables calculated from figures on the balance sheet include total operating capital, generally referred to as TOC, and net operating working capital, typically referred to as NOWC. These variables provide information about a company’s liquidity and growth potential.
Net operating working capital is the net amount of monies captured by the assets a company needs to run its business on a daily basis. Calculate NOWC by subtracting all short-term liabilities that have no associated interest payments from the short-term assets used in daily operations. These short-term liabilities include accounts payable and accruals, such as accruals for employee bonuses. The short-term assets include cash, accounts receivable and inventory.
Working capital takes a broader view than net operating working capital. Essentially, NOWC is a subset of working capital. Working capital is current assets less current liabilities. Current, or short-term, assets include cash, receivables and inventory as does NOWC. However, it also includes rents and other bills paid in advance, raw materials and work-in-process. Current liabilities include accounts payable and accruals, as with NOWC, but also includes customer deposits, lines of credit and current portions of long-term debt.
Total operating capital is the amount of assets, both short-term and long-term, remaining after deducting current liabilities arising from operations. This capital is what a company requires to support its operations. Calculate TOC by subtracting a company’s net fixed assets -- property, plant and equipment -- from its net operating working capital.
Total operating capital has two components, one short-term and one long-term. NOWC is the short-term component of total operating capital. Some lenders and investors prefer to use TOC and NOWC over broader definitions of capital and working capital due to the terms' focus on operations. Because lenders use working capital as a measure of liquidity, some companies try to inflate that number by including as many assets as possible. By focusing solely on operating assets, lenders can ensure the numbers they have are credible measures.
A distribution company has $50,000 in cash, $100,000 in accounts receivable and $100,000 in inventory on its balance sheet. It also has $750,000 in long-term assets after deducting accumulated depreciation. On the liabilities side, the distribution company has $80,000 in accounts payable and $50,000 in accruals. The sum of its cash, receivables and inventory is $250,000. The sum of its payables and accruals is $130,000. Therefore, NOWC equals $120,000 which is $250,000 less $130,000. TOC equals NOWC plus net fixed assets which is $120,000 plus $750,000 for a total of $870,000.