Your definitive guide to non-cash working capital
Non-cash working capital (NCWC) includes current assets, such as inventories and accounts receivables, that are used by businesses to finance their daily operations.
This article will discuss the non-cash working capital definition, its examples, formula, and how it’s distinct from working capital.
Non-cash working capital: Meaning
As the name indicates, a business’s non-cash working capital refers to the part of the working capital, net of liquid cash, that it can use to fund its ongoing operations. It’s the amount a business has left over after deducting its current assets, net of cash, from its current liabilities.
Non-cash working capital is a form of working capital that may convert to money shortly, such as accounts receivables. This financial measure helps a company gauge its financial health and evaluate its turnover speed—the time it takes the company to convert its non-cash current assets into cash.
Change in non-cash working capital also helps get a read of the company’s future cash flows and predicts its growth trajectory.
What is included in non-cash working capital?
Since non-cash working capital is essentially the value leftover after current assets (net of cash) are subtracted from current liabilities, it includes current assets, such as:
- Accounts receivables,
- Inventory, including raw materials, finished goods, and components,
- Marketable securities (short-term liquid securities),
- Prepaid expenses and liabilities, such as insurance payments,
- Short-term loans to debtors, and
- Other liquid assets, such as promissory notes and tax refunds.
Similarly, current liabilities include:
- Accounts payable,
- Accrued expenses,
- Accrued interest,
- Dividends,
- Short-term notes payable,
- Short-term debt/loan, and
- Other current liabilities.
These current assets of a company are subtracted from its current liabilities to arrive at the non-cash working capital figure.
Why calculate non-cash working capital?
A business usually calculates its non-cash working capital for the following reasons:
1. Understand the impact of NCWC on cash flow
Since non-cash working capital doesn’t take cash into account, its calculation can help you understand your company’s growth potential and its dependency on cash.
For instance, if your inventories’ value goes down, it’s probably because you sold it for cash. Similarly, a decrease in your marketable securities or accounts receivables shows that you turned it into cash or received money from your debtors, respectively.
Conversely, your business will witness a positive cash flow and encourage investment from potential investors.
2. Helps evaluate the company’s turnover cycles
Turnover cycles impact your inventories, cash, accounts receivables, and accounts payables. These cycles help gauge the time you take to turn your inventories to cash and pay off your creditors. They also indicate the time taken to receive money from the company’s debtors.
Non-cash working capital highlights if a company turns its non-cash assets into cash before they begin depreciating. Generally, a high turnover rate shows that the company is generating revenue and earning profit.
3. Aids in projecting the present value of future cash flows
Investors often look at a company’s future cash projections before investing in a company. They do this by using the discounted cash flow method, wherein they calculate the present value of the business’s future cash flows.
As discounted cash flow takes the time value of money into account, non-cash working capital helps understand the business’s future cash flows.
Non-cash working capital: Formula
You can calculate non-cash working capital using any one of the two formulas listed below:
- In the first method, you just have to subtract the value of current assets (devoid of cash) listed on your balance sheet from the current liabilities value.
| Non-cash Working Capital = Current assets (less cash) - Current Liabilities |
- In the second formula, you need to add your company’s receivables and inventory and subtract the resulting amount from your accounts payable.
| Non-cash Working Capital = (Accounts Receivables + Inventory) - Accounts Payable |
What is non-cash working capital on the balance sheet?
On the balance sheet, non-cash working capital is indicated by the difference between the current assets and current liabilities of a company, barring cash and cash equivalents. It clearly indicates the funds a company has on hand to fund its operations, pay off short-term liabilities, and other expansion plans.
The non-cash working capital lets a company understand its dependence on liquid cash. This is particularly helpful as the business can better prepare for future emergencies and work on converting its current assets (except cash) to cash.
Related article: The best cash flow forecasting software in 2023
What is an example of non-cash working capital?
Let’s consider the balance sheet of MKP Inc., for the financial year ended 31st March, 2023 to understand non-cash working capital with the help of an example.
| Description | Year |
|---|---|
| ASSETS | |
| Current Assets: | |
| Cash and Cash Equivalents | £38,927.00 |
| Marketable securities | £56,781.00 |
| Accounts receivable | £14,092.00 |
| Inventories | £47,623.00 |
| Other current assets | £9,876.00 |
| Total current assets | £167,299.00 |
| Non-current Assets: | |
| Securities | 1,00,567 |
| Property, plant and equipment | £78,987.00 |
| Other non-current assets | £5,867.00 |
| Total non-current assets | £84,854.00 |
| Total assets | £252,153.00 |
| LIABILITIES AND SHAREHOLDERS' EQUITY | |
| Shareholders' equity: | |
| Common stock and additional paid-in capital | £18,977.00 |
| Retained earnings | £6,543.00 |
| Total shareholders' equity | £25,520.00 |
| Current Liabilities: | |
| Accounts payable | £28,973.00 |
| Other current liabilities | £47,865.00 |
| Term debt | £10,743.00 |
| Total current liabilities | £87,581.00 |
| Non-current Liabilities: | |
| Long-term debt | £119,041.00 |
| Other non-current liabilities | £20,011.00 |
| Total non-current liabilities | 139,052.00 |
| Total liabilities and shareholders' equity | £252,153.00 |
Calculation:
Based on this balance sheet, MKP’s non-cash working capital using the first formula is:
Non-cash Working Capital = Current assets (less cash) - Current Liabilities
= £{(1,67,299 - 38,927) - 87,581}
= £{1,28,372 - 87,581}
= £40,791
Similarly, MKP’s non-cash working capital using the second formula is:
Non-cash Working Capital = (Accounts Receivables + Inventory) - Accounts Payable
= £(14,092 + 47,623) - £28,973
=£61,715 - £28,973
=£32,742
Both these calculations show that MKP has enough assets to pay off its short-term liabilities.
Negative non-cash working capital
If a business’s current liabilities are more than its non-cash current assets, then it’ll have a negative non-cash working capital. Even though in our example, MKP’s non-cash working capital is positive, it’s important to note that for some companies, the non-cash working capital amount can be negative as well.
A negative non-cash working capital could be the direct result of an increase in the company’s accounts payable. The amount could also be negative if the amount of its accounts receivables or inventories decrease, increasing its cash working capital.
Non-cash working capital: Cash flow statement
Big increases in non-cash working capital bodes well for companies since it shows that a company turns its non-cash current assets to cash quickly. This reflects positively in the company’s cash flow statement as it results in a surge of cash in the cash flow statement and helps a company reel in potential investors.
In comparison, non-cash working capital decreases in the cash flow table, shakes investor confidence and makes the company a risky venture.
When investors evaluate a company’s worth, they check its discounted cash flows to recognise its projected cash flows’ present value. Non-cash working capital lets you project your cash flows better since you’ll have complete visibility over your current non-cash assets.
A high projection of present value, given the industry average estimates, can make your company more lucrative for investment.
Non-cash working capital vs working capital. What is the difference?
The major difference between non-cash working capital vs working capital is that non-cash working capital accounts for current assets (without cash) while working capital accounts for current assets with cash.
Working capital is a broad concept, while non-cash working capital forms a part of a business's working capital. Working capital emphasises a company's liquid cash more. In contrast, historical NCWC focuses on a company's current assets and how quickly it can turn them into cash without considering its cash reserves.
How to work out working capital?
Working capital calculation is quite easy if you already have the non-cash working capital amount with you. All you need to do is add the cash and cash equivalents amount from your balance sheet and you’ll have the working capital amount.
Alternatively, you could subtract current assets from current liabilities to find out the amount of the working capital. You can divide current assets by current liabilities to figure out the working capital ratio.
Key Takeaways
Non-cash working capital is an important financial metric since it makes it easier for a business to determine how it can turn its non-cash assets into cash. It lets the business decide how it would fund its operations should it need to rely on non-cash assets to finance its ongoing operations and pay off short-term liabilities.
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