I'm sure you've heard of the operational needs for funds also known as NOF. What are these needs and how are they calculated? Go ahead, read on, I assure you it is a very interesting and profitable topic for your small, medium or large company.
Explained in simple terms, we could say that NOP, or Net Operating Profit, is those investments that the company must make in everyday life to continue operating and doing their jobs normally and competently.
From an accounting point of view, operational cash requirements have a lot to do with two concepts that you are familiar with if you have been running a business for a long time: current assets (the assets, the money available to the company to meet its expenses) and current liabilities (obligations, payments to be assumed by the company in the short term).
If you look, a few lines ago we were discussing that the operational needs of funds are investments and not expenditure. You know the difference between the two concepts:
Is the fact that NOFs are investments and not expenses important? Yes, from your company's financial and accounting perspective. The reason is simple: if you invest an amount of money x to keep your company afloat in the market, you will be doing so to receive benefits in the short, medium and long term. These benefits can be of a different nature: keeping the company open, knocking out your direct competition, expanding into new cities or countries, etc. If you had no hope of receiving benefits allocate funds to operate, you simply wouldn't do it, or if you did, you'd be incurring an expense rather than an investment.
On the other hand, and as you know, all companies have a NOF concrete, needs of operational funds of greater or lesser consideration that we must calculate for no liquidity and solvency problems: the need to replenish stock in our warehouse to continue selling, the need to have funds available to finance the late payment of invoices by your clients, etc.
How is working capital requirement calculated? We'll look at this in the next section.
As you can imagine, although all companies have operational funding needs, not all these NOFs are the same Neither in volume nor in calculation complexity. It is easy to understand that, for example, a small mechanical workshop will not have the same operational fund needs as a large multinational company for vehicle repair and maintenance.
Furthermore – and as we saw in the previous section – operational funding needs have a lot to do with the company's current assets, with that capital that companies need in order to to cope with its current operationsPayments to creditors, salary payments, tax payments, refuelling, etc. petrol for company vehicles, etc. Furthermore, these NOFs are also related to another accounting concept that will surely sound quite familiar: the liabilities circulating.
Thus, there are several ways to calculate a company's EBITDA, but one of the simplest is to apply the following Mathematical formula:
NOF = Stocks o stock + Balances of Clients Treasury Liabilities comprising taxes outstanding, supplier balances (invoices owed to suppliers), various other expenses, etc.
What did you think of this article? Did it clarify any doubts you had about fund operational requirements? Go on, give us your opinion!
