Non-Cash Working Capital (How to Calculate it and Examples)

There are various metrics for evaluating the financial health of a company and determining if it's an attractive investment. Non-cash working capital (NCWC) is a measurement of the available assets a business has to fund operations. Learning about NCWC can help you understand how to do the calculations necessary to assess the value of a business. In this article, we explain what non-cash working capital is, provide formulas for calculating it in two different ways, detail why it's important, explore the steps you can take to calculate it, and provide example calculations for your review.

What is non-cash working capital?

Non-cash working capital (NCWC) is a measurement of the available funds a business has to keep their operations going, not including any cash they have available. You can calculate working capital, excluding cash, by determining the value of a company's assets and subtracting liabilities. Alternatively, you can determine the value of accounts receivable and inventory and then subtract accounts payable. NCWC is one of many methods used for evaluating the value of a business. A value of NCWC indicates that a business has valuable assets, while a low number suggests a business isn't doing well financially.

NCWC doesn't include cash on hand, but it takes account of assets like raw materials, finished products, and accounts receivable. The assets included in NCWC calculations often convert to cash at a later date, so investors often consider how the business changes NCWC into cash.

Formulas for calculating NCWC

There are two formulas you can use for calculating NCWC. You may choose a formula according to the type of business and the information you have available to make calculations. Here are the two formulas for calculating NCWC:

• NCWC = current assets without cash − current liabilities

• NCWC = accounts receivable + inventory − accounts payable

Importance of NCWC

NCWC is important because it can reveal information about different aspects of how a business operates. Here are some of the reasons why NCWC is a useful calculation:

Impacts cash flow

NCWC can impact how much cash a business has or might have in the future. Working capital, such as accounts payable and finished inventory, often converts to cash at a later date, so a high number of NCWC can indicate the potential for more cash in the future when a company sells inventory and receives payment on accounts. Alternatively, a low number of NCWC can indicate that a business has a large amount of cash already that can potentially be used to expand operations and grow the business.

Affects turnover

Turnover refers to how fast a company buys and sells inventory or receives payments for accounts receivable. A high rate of turnover can indicate that a company is healthy financially, continuously making sales, and doing business with other companies. By observing fluctuations in the NCWC of a company, you can determine rates of turnover and see how inventory moves through the business. If a company has a low rate of turnover, it can suggest that it's holding on to inventory too long and the value of those goods can potentially depreciate.

Determines discounted cash flow

You can use NCWC to help determine discounted cash flow, which is a calculation of the cash a company can expect to have available in the future. Determining discounted cash flows can help investors determine if a company might rise in value in the future as it sells inventory and receives payments. Discounted cash flow assigns a present value to the cash a company might have in the future based on their current inventory and accounts receivable, and indicates if a company might be a sound investment based on future earnings.

How to calculate NCWC from current assets

Follow these steps to calculate NCWC using current assets:

1. Calculate current assets

First, you may determine all the assets that the company currently possesses. You can calculate assets by adding cash, cash equivalents, inventory, accounts receivable, marketable securities, prepaid expenses, and other liquid assets. Most of this information is usually freely available on a company's balance sheet. Adding these amounts together and using the most current figures gives you the company's current assets.

Related: What Is a Balance Sheet? FAQs, Components, and an Example

2. Subtract cash

If you're trying to determine the working capital of a company without including cash, then after you calculate the company's assets, subtract cash. The amount of cash a company currently has is usually on its quarterly balance sheet. Subtracting cash from asset value tells you the current non-cash assets of the company.

Related: What Are Accounting Transactions? (Definitions and Examples)

3. Calculate liabilities

The next step involves adding all the company's current liabilities. Liabilities can include loans, accounts payable, mortgages, bonds, and accrued expenses. Review the company's financial records to find the current liabilities and then add them together.

4. Subtract liabilities from current non-cash assets

The final step in the calculation involves subtracting liabilities from current non-cash assets. This calculation gives you the NCWC of the company. You can then use this figure to perform further analysis of the company and draw conclusions about its financial health. It might be beneficial to perform this calculation multiple times using different sets of quarterly financial records to get an idea of the health of the company over time.

How to calculate NCWC from accounts receivable and inventory

There's a second way to calculate NCWC. Follow these steps to calculate NCWC using accounts receivable and inventory:

1. Calculate accounts receivable

Accounts receivable represents amounts that customers or other companies owe to a business for services rendered or products delivered. It's the expectation of future payment based on sales a company has already made. Once they pay the amount, it starts to count as cash on the company's balance sheet. Accounts receivable may include elements like customer purchases made on credit or receipts from other companies representing an amount owed for materials or services. Accounts receivable is usually on a company's public balance sheet.

2. Calculate inventory value

Inventory value is the value of all the goods that a company has in its possession. It can include completed products, raw materials, and partially completed products. You can calculate inventory by multiplying the number of units in inventory by the price per unit.

3. Calculate accounts payable

Accounts payable are all the debt a company owes to other businesses and other creditors. They can include bills for raw material purchased from suppliers, money owed for rent or machinery rentals, and bank loans to finance company operations. All of this information can be located on a company balance sheet.

Related: What Is Accounts Payable? (Required Duties and Skills)

4. Calculate NCWC

To calculate NCWC, first add accounts receivable and inventory value, then subtract accounts payable. Try to do this calculation over multiple time frames to come to an accurate understanding of company finances. You can then use this number to determine if a business might be a profitable investment.

Example NCWC calculations

Calculating a company's NCWC can help you gain an understanding of their assets, liabilities, and possible future value. Here are two examples of how to calculate NWCW:

Example of calculating NCWC for a manufacturing company

You can use this example to learn how to calculate NCWC:

Larson and Carson Ltd. is a manufacturing company with $100,000 in inventory, $10,000 in accounts receivable, $50,000 owed for raw materials, and $10,000 in outstanding loans. They determine their current assets using the NCWC formula:

NCWC = accounts receivable + inventory − accounts payable

NCWC = 10,000 + 100,000 − 50,000 − 10,000 = $50,000

After finding their total assets and subtracting their costs and liabilities, Larson and Carson Ltd. determines that they have $50,000 in currently available assets.

Example of calculating NCWC for a wholesaler shop

Here's another example of how to calculate NCWC:

Regality and Such Corp. is a wholesaler with $1,000,000 in inventory, $200,000 in accounts receivable, $40,000 in cash, $100,000 in outstanding loans and $1,500,000 in bills owed. They can calculate their NCWC using the NCWC formula:

NCWC = accounts receivable + inventory − accounts payable

NCWC = 200,000 + 1,000,000 − 100,000 − 1,500,000 = −$400,000

Regality and Such Corp. is surprised to find a negative sum for their working capital. The company realizes that their financial situation has become more difficult and that it may require more capital to continue operations. It begins working on designs for newer, even more luxurious items and discusses strategies to reduce production costs with various operational teams. The company's management also reassures itself that NCWC is one of many methods to calculate the health and cash flow of a business, and that conducting repeated evaluations over a longer period can help them gain a more thorough understanding of the reasons for their low NCWC.