This article will help you get to grips with the concept, including what non-cash working capital is, how it’s calculated and its role in forecasting and financial planning.
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Working capital is a key financial metric for growing businesses, offering insights into your liquidity and financial stability. Non-cash working capital is a subset that focuses on your assets and liabilities excluding cash – the less liquid, but still crucial part of your assets.
Let’s start with a simple definition of non-cash working capital. It represents your company’s working capital, minus any cash and cash equivalents. Essentially, the amount available after deducting your current assets, net of cash, from your current liabilities.
Excluding these elements means business owners and financial leaders can zone in on inefficiencies, opportunities for investment or any requirements for using cash reserves or alternative funding.
Traditional working capital is a bigger picture view of liquidity in assets held and due to the business, plus available cash for day-to-day expenses. Also referred to as net working capital, as it is net of liabilities, it shows your company’s ability to cover short-term financial obligations.
Meanwhile, non-cash working capital reveals how effective your company is at managing working capital without relying on business cash injections.
Both metrics can help you monitor financial performance, plan operational improvements and make informed, strategic decisions for business investments.
Here is some further reading on working capital from our Finance Explained series:
On the current assets side, you have accounts receivable, inventory and prepaid expenses:
Receivables are what your business is due from sales which are yet to be collected from customers or money owed by clients for goods or services delivered.
This includes goods/stock yet to be sold, raw materials and work-in-progress, which reflects various resources tied up in projects and your sales cycle.
These are payments made in advance for services or goods, such as insurance premiums, which hold short-term value.
On the current liabilities side, the main components are accounts payable and accrued liabilities:
Obligations to pay suppliers for goods or services already received (unpaid invoices), which remain short-term credit until payments are due.
Your company’s accrued liabilities are various unpaid expenses, such as staff wages and taxes.
These non-cash working capital components all affect your cash flow and liquidity available for business operations.
The non-cash working capital formula to use is:
Non-cash working capital (NCWC) = current assets (excluding cash and cash equivalents) - current liabilities (excluding short-term debt)
While this might sound like a simple equation, let’s clarify the elements excluded, which appear in your overall working capital figure.
Cash equivalents are short-term investments that can be easily converted into cash, such as commercial paper/bonds, money market funds and other securities with a maturity of 90 days or less. As they’re not necessarily tied to day-to-day operational activities and can be used for other purposes, they’re removed from current assets.
Short-term debt is excluded from non-cash working capital because it represents financing decisions rather than operational liabilities – think bank overdrafts or temporary loans and lines of credit (maturing in less than 12 months).
To demonstrate the NCWC formula playing out, let’s say your company has the following assets and liabilities:
Current assets
Total: £90,000
Current liabilities
Total: £50,000
This is how your non-working capital would be calculated:
Current assets excluding cash/cash equivalents: (£90,000-£15,000) = £75,000
Current liabilities excluding short-term debt: (£50,000-£5,000) = £45,000
NCWC: £75,000 - £45,000 = £30,000
Non-cash working capital can play a key role in strategic planning and cash flow management. It also helps gauge your company’s value, financial health and turnover cycle (the time it takes to convert non-cash current assets into cash).
However, the main purpose is to judge operational efficiency, including how well your business manages its current assets and liabilities and handles operations without eating into cash reserves.
As changes in non-cash working capital affect cash flow, monitoring the figure and determining influencing factors can help your organisation implement strategies to drive down costs and reduce the level of liquidity tied up in inventory and outstanding invoices.
With over a trillion pounds in excess working capital globally (according to PwC), non-cash working capital insights can identify areas where cash can be freed up.
Changes in non-cash working capital can hugely impact your ability to carry out day-to-day operations effectively and fulfil financial obligations. Although the figure excludes cash/cash equivalents, significant changes flag up impending cash flow issues or predict growth potential.
Positive non-cash working capital is crucial for operational stability, meaning you have sufficient liquidity to meet short-term obligations without threatening business continuity. However, a sharp increase can signify too much liquidity trapped in inventory or mounting receivables.
Here are a few examples of changes in non-cash working capital affecting cash flow:
Calculating non-cash working capital and monitoring changes in your cash flow statement puts assets that aren’t directly convertible into available liquidity into focus. But it’s not as simple as a high or low non-working capital figure meaning your business is in good shape, as there are lots of influencing factors.
Net change in non-cash working capital highlights where cash is tied up in inventory and receivables or released through liabilities, and how quickly you’re able to convert assets/liabilities into cash, supporting your forecasting and financial decision-making.
Late payments cost UK businesses on average £22k per year, and lead to millions of hours of lost productivity across the economy. UK Prime Minister, Keir Starmer, recently said, “We know how important it is for business owners to have the peace of mind and certainty around their cash flow to keep their businesses alive.”
Understanding these dynamics and anticipating changes helps you predict cash flow fluctuations and put measures in place to sustain liquidity and spark growth.
So, what does using non-cash working capital insights look like in practice? Here are some ways businesses can use the data to improve operational efficiency:
Have you considered working capital finance? If your liabilities outweigh your assets, you should explore working capital funding solutions, such as invoice finance, revenue-based financing, trade credit, supply chain finance or working capital loans.
Working capital finance solutions alleviate financial pressure, especially if your non-cash working capital is precariously low or negative, and are typically quicker and easier to access than traditional finance solutions, with less emphasis on credit history. Plus, they allow you to use funds directly for operational requirements.
iwoca is a leading small business loan provider, helping companies of all kinds to overcome working capital challenges and invest in future growth. Our popular Flexi-Loan solution was designed to address key working capital needs and offers fast access to funds, with flexible repayment terms.
Applying for funding online takes just minutes and you can borrow between £1,000 and £1,000,000 for periods of a day up to five years, with typically same-day approval decisions. We don’t charge for early repayments and you only pay interest on the funds you use. Learn more about our flexible loan solutions.
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Non-cash working capital (NCWC) measures the difference between your company’s current assets (minus cash) and current liabilities for judging its liquidity excluding cash and cash equivalents and operational efficiency managing receivables, inventory and payables.
Net working capital (NWC) is simply the difference between your current assets and current liabilities while NCWC removes cash, cash equivalents and short-term debt from the equation, to leave just the operational values in your cash flow statement.
To calculate the net change in non-cash working capital, you just subtract the NCWC at the start of the specific period from the figure at the end of the previous one.
If you have negative non-cash working capital, it means your current liabilities exceed non-cash current assets, which is a red flag for business owners, as it indicates a need to improve working capital management and iron out operational inefficiencies.
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