to maintain a large cash balance for day-to-day
operations or a firm that operates in a poorly
developed banking system, the cash may not be
investedormayearnabelow-marketrateofreturn.
Inthesecases,cashcanbeconsideredtobepartof
workingcapital,notsomuchbecauseitisneededfor
operationsbutbecauseitisawastingasset(earning
less than a fair rate).- We will also back out all interest-bearing
debt—short-termdebtand theportionoflong-term
debt that is due in the current period—from the
currentliabilities.Thisdebtwillbeconsideredwhen
computing cost of capital and it would be
inappropriate to count it twice.
Will these changes increase or decrease working capital
needs? The answer will vary across firms.
Thenoncash workingcapital varieswidelyacrossfirms in
different sectorsand oftenacrossfirmsin thesamesector.
Figure3.2showsthedistributionofnoncashworkingcapital
asapercentofrevenuesforU.S.firmsinJanuary2005.Note
the number of firms that have negative noncash working
capital.Wewillreturn laterin this sectionto considerthe
implications for cash flows.
FIGURE 3.2 Noncash Working Capital as Percent of
Revenues