Question

1. What is net operating working capital? Why does it exclude most short-term investments and notes payable?

2. What is total net operating capital? Why is it important for managers to calculate a company’s capital requirements?

3. What is free cash flow? What are its five uses? Why is FCF important?

Answer 1

1. What is net operating working capital

Net operating working capital is the excess of operating current assets over operating current liabilities.it can be considered as the cash plus accounts receivable plus inventories minus accounts payable minus accrued expenses. By using this formula we can arrive at net operating working capital. Net operating working capital is a measure of a company's liquidity.

But in case of net working capital  buyers often exclude cash from the calculation because it is assumed the seller will remove all cash to completing the transaction. With this here all short term investment and notes payable. The best way to calculate net working capital is by removing Cash and short term investment from the current assets and removing Notes Payable or Current portion oflong term debt from Current liabilities.

2.Total net operating capital

Total net operating capital represents all the current and non-currents assets used by a business in its operations. It includes inventories, accounts receivables, fixed assets, etc. Here we take all assets without seggragating into current and non current asset. This is the total amount of net operating working capital and non current operating asset.

   Why is it important for managers to calculate a company’s capital requirements? so we should say It is very important because it is a measure of a company's ability to pay off short-term expenses or debts. but we should also take care of another thing that is excess working capital represents that the assets are not being invested for the long-termin a proper manner and so they are not helping the company grow as much as possible. So it should be identified inorder to grow the company.

3. Free cash flow

Free cash flow is the cash which a company generates after the cash outflows for the operations and maintain its capital assets. It is very important to maintain the operations of the company. So we should know how much cash we have after meeting the capital expenditure. This is known as free cashflow.

Five uses of Free cashflow are,

1. Pay interest on debt.
2. Pay back principal on debt.
3. Pay dividends.
4. Buy back stock.
5. Buy nonoperating assets.

By using free cashflow we can do these things and these 5 things are generally known as five use of free cash flow.

Why it is important?

Free cashflow is very much important because it makes a value to the company and for equity share holdees also.For developing new products of the company it is very important to have a positive cashflow. So if there is enough cash with in the hands then company can launch new products and along with that this will also helps the company to pay their dividends, make acquisitions, payment of debt obligations, and makes more investment etc. So doing these transaction will makes the company more reputable and it will leads to the value addition to the company. This is why Free cashflow is very important to the business.

ThankYou....