At SmartCapitalMind, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.
Net operating assets (NOA) are the assets a business has for operating minus the liabilities is has in operating. The formula used to determine NOA helps businesses determine how much money they have for operating costs. Many businesses get extra funding through financial instruments, such as stocks, and this often has to be removed from the asset pool for one to get a realistic view of net operating assets without outside help. Calculating net assets is easy, because it is a single-step subtraction problem. Businesses use this number to understand how much money they have left for additional investing or new operations. It often is used to calculate return on investment (ROI), being balanced against revenue.
Before someone performs a calculation of NOA, he may have to accurately balance the asset pool. This is the total amount of money the business has that can be spent on supplies, equipment and employees. The total asset amount generally is inflated by funding from people or financial instruments, and the business includes these as assets. Many financial experts believe that, to get a picture of how the business would do if left alone, this money should be subtracted from the asset pool. For example, if the total asset pool is $10,000 US Dollars (USD), but $3,000 USD is from stocks and bonds, then the asset pool for this calculation is $7,000 USD.
To determine net operating assets, total operational liabilities must be removed from the asset pool. Operational liabilities are costs associated with running the business, or when costs are offset to a financial institution, as with a credit card. If the liabilities are $5,000 USD, and the asset pool is $7,000 USD, then the net operating assets are $2,000 USD.
One use for this calculation is so the business knows how much more it can spend on operations without owing money. For example, if the net operating assets total is $2,000 USD, then this means the business has $2,000 USD to spend on extra employees, upgrading equipment or performing other operational activities. While the business can spend more than the NOA amount, this is usually not advised because resources may have to be pulled out of other sectors and used to pay for operations.
Another way net operating assets is used is to calculate ROI. The typical ROI formula divides revenue against costs, and this can be used to represent costs. If there is a negative ROI, then the business usually has to scramble to make more money, because a poor return can eventually lead to bankruptcy.