What it means
A company's current liabilities are the debts due within about a year. Some of these carry interest, such as a bank overdraft or a short-term loan, and some do not.
The non-interest-bearing ones arise naturally from doing business, because suppliers allow time to pay and employees are paid after they have worked. Common NIBCL items include accounts payable, accrued wages, taxes payable and deferred revenue, which is money received from customers for work not yet delivered.
These items are effectively free credit from suppliers, staff, tax authorities and customers. The more of this free funding a business can use, the less it needs to borrow.
NIBCL is used to measure the capital the business needs for its operations. Operating working capital is calculated by taking operating current assets, such as receivables and inventory, and subtracting NIBCL.
The result shows the money tied up in day-to-day trading that must be financed from other sources. The same logic is used in measures of invested capital and return on invested capital.
When analysts work out how much capital a company needs, they deduct NIBCL from total assets, because these liabilities fund assets without costing interest. Leaving them in would overstate the capital the company has to pay a return on.
There are some important points to watch. Stretching supplier payments boosts NIBCL and reduces apparent funding needs, but if it goes too far, suppliers may withdraw credit or charge more.
Items such as deferred revenue are not interest-bearing but still represent an obligation to deliver, so they are real commitments. The distinction from interest-bearing debt is also important for credit analysis.
Lenders look at interest-bearing debt to judge leverage, while NIBCL is seen as part of operations. A business with high NIBCL relative to current assets may still be fine if the pattern is stable, but it can run into trouble if suppliers shorten payment terms.
In practice
Real-world examples.
Example
A furniture maker buys wood on 60-day terms and pays staff monthly. Its accounts payable of $220,000 and accrued wages of $80,000 are NIBCL. The finance director notes that this $300,000 of free funding reduces the amount the company needs from the bank.
Example
A software company sells annual subscriptions and collects $1,200,000 in advance. The cash appears as deferred revenue, which is a non-interest-bearing current liability. The company can use the cash for development, but it still owes customers a year of service.
Example
A supermarket chain pays suppliers 45 days after delivery but sells most goods within 10 days. Its NIBCL is larger than its inventory, so its working capital is negative. This means customers and suppliers effectively fund the business, a hallmark of efficient retailers.
Formula
Calculation
Net operating working capital = operating current assets - non-interest-bearing current liabilities
A company has accounts receivable of $500,000 and inventory of $400,000, so its operating current assets are $900,000. Its NIBCL consists of accounts payable of $350,000 and accrued expenses of $150,000, a total of $500,000. Net operating working capital = $900,000 - $500,000 = $400,000. This is the amount that lenders and shareholders must fund for the business to operate.Case study
Seen in the real world.
Marigold Distribution is a fictional wholesaler used here for illustration. In this illustrative story, its lender asked why the business needed a $2,000,000 overdraft, since sales were growing and profits were healthy. The finance manager prepared a schedule showing operating current assets of $4,200,000 and NIBCL of $2,600,000.
The schedule showed a funding gap of $1,600,000 in working capital, and the manager explained that the growth in receivables outpaced growth in supplier credit. The lender agreed to the overdraft but asked the company to negotiate longer supplier terms and tighten customer collections. Within six months, NIBCL rose to $3,000,000 and the overdraft was cut by $400,000.
The finance manager also began to report net operating working capital as a percentage of sales each month. That simple figure told the board whether growth was being funded by suppliers or by the bank, and it became a standing item in the monthly pack.
Watch out
Common mistakes.
- Treating all current liabilities as free funding. Overdrafts and short-term loans carry interest and must be excluded from NIBCL.
- Assuming more NIBCL is always better. Over-stretching suppliers can damage relationships and lead to tighter terms.
- Forgetting deferred revenue. It is an obligation to deliver goods or services, even though no interest is charged.
Questions
People also ask.
What items count as NIBCL?
Typical items are accounts payable, accrued expenses, taxes payable, customer deposits and deferred revenue.
How is NIBCL used in ROIC?
It is deducted when working out invested capital, so that the return is measured on capital that needs to be financed.
Is the current portion of long-term debt included?
No, because it is interest-bearing debt, even though it falls due within a year.
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