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Conclusion

Understanding the net operating working capital number provides insight into a company’s operational performance. It is a measure of cash flow and can help small business owners make decisions and changes regarding strategy. The right NOWC number depends on the industry and the company itself. When measured correctly, it shows how a company can take advantage of new investments or where there may be a financial shortfall.

Now that you're familiar with the meaning of working capital and net operating working capital, you might like to find out more about working capital loans and how to use them right for your business.

FAQ

What is the difference between working capital and operating working capital?

Working capital (also known as net working capital, or NWC) refers to all current assets and current liabilities. This includes interest-bearing assets or liabilities, such as investments in money market accounts or credit card debt. Operating working capital refers to the assets and liabilities related to the operating activities of the business, such as accounts receivable, accounts payable, and inventories. 
 

What do changes in net operating working capital mean?

Changes are actually a normal part of the net operating working capital over time. There is a natural ebb and flow with an increase or decrease in NOWC.

What is a good net operating working capital ratio?

To calculate the NOWC ratio, you simply divide the current operating assets (COA) by the current operating liabilities (COL). For example, if the COA is $8,000 and COL is $2,000, you divide the numbers and the answer is 4. This means the ratio is 4. Whether or not this is a good NOWC ratio depends on the industry. Generally speaking though, an NOWC ratio of 2 to 1 is what a company should aim for.

About the Author

Sara Coleman

Sara Coleman

Freelance Financial Writer

Freelance writer with several years of experience covering personal finance topics such as insurance, loans, credit cards, budgeting and more.

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