United States Navy activities financed through the NWCF perform a wide variety of functions including Supply Management, Depot Maintenance, Research and Development, Transportation, and Base Support. The NWCF continues to pursue some important efforts to improve efficiency and maximize effectiveness. Success in these endeavors is critical to ensuring that the Department of the Navy can afford both the ongoing support costs of fleet operations and the necessary reinvestment in new platforms and weapons systems.
Stock funds, in use by the Navy since the 1870s, were aimed at financing the procurement of material (spare parts and other items) in volume from commercial sources, to be held in inventory. This material was intended to be sold to customers, in order to achieve weapon systems readiness or to provide personnel support. Industrial funds, in use by the Navy since the 1940s, provided industrial and commercial goods and services such as depot maintenance, transportation, and research and development. The National Security Act Amendments of 1949 authorized the United States Secretary of Defense to establish revolving funds as the business model for the operation of these funds.
In 1991, all of DoD’s stock and industrial funds were rolled into a single revolving fund, the Defense Business Operations Fund (DBOF), along with five additional defense commercial operations or business areas previously funded with direct appropriations. DBOF was capitalized at a level significantly less than the sum of the stock and industrial funds it replaced. The consolidation of stock and industrial funds caused overall cash levels to be reduced, by allowing funds or capital to be shared across all of the activities, resulting in cash flow problems. The Defense Authorization Act addressed this issue, requiring that DoD conduct a comprehensive study of DBOF and present its findings along with a proposed improvement plan to Congress for approval.
In December 1996, DBOF was reorganized into four working capital funds (Army, Navy, Air Force, and Defense-Wide). With the addition of a fifth fund—the Defense Commissary Agency in 1999—the new organization was now officially called the Defense Working Capital Fund (DWCF). The five funds and their corresponding business areas provide goods and services to DoD and authorized non-DoD activities.
Customer orders accepted by the NWCF activities must be either obligations of a federal government activity or cash advances from non-federal government customers. The acceptance of a customer order creates a quasi-contractual relationship between the NWCF activity and its customer. The customers of each NWCF activity are responsible for budgeting for and budgetary control of the cost of end products and services ordered from the NWCF activity. The customer cannot use its appropriated funds to do indirectly (through the NWCF activity) what it is not permitted to do directly. The availability of an appropriation cannot be expanded or otherwise changed by transfer to the NWCF. The customer bears the primary responsibility for the determination of the applicability of its appropriated funds in the orders placed with the NWCF activity.
In conjunction with the stabilized rate policy, the NWCF uses a cost recovery, or breakeven policy. With stabilized rates, gains or losses in operations may occur as a result of variations in program execution. To maintain full cost recovery and thereby to break even over the long term, NWCF activities generally adjust their rates each year to reflect such realized gains and losses.
Revolving funds operate in a fashion similar to a personal checking account. An individual deposits income into their account. In order to maintain themselves as a "continuing operation," necessary goods and services must be purchased, reducing the fund total. In order to keep the fund balanced, expenditures must not exceed income. By keeping a positive account balance, and by looking for ways to stretch capital further, revolving fund activities are exercising sound financial management.
A revolving fund gets its name from the cyclic nature of the cash flow. Income from customer purchases is used to finance a service providers' continuing operations, i.e., the business areas in a working capital fund sell goods or services with the intent of recovering the total cost incurred in providing those goods and services. Income from sales is then used to buy or replace inventory and finance the production of future goods and services.