Accounting is essential for understanding a company’s real-time financial strength, whether it is about fulfilling short-term or long-term obligations. Together with the liquidity ratio, operating working capital (or OWC) measures the firm’s ability to meet its short-term cash demands.
What is Operating Working Capital (OWC)?
Operating Working Capital (OWC) is the measure of current assets required to run day-to-day business operations. OWC represents liquidity and helps to understand the company’s ability to meet its short-term obligations.
In accounting terms, operating working capital is the difference between operating current assets and operating current liabilities. When assets or liabilities are employed in regular business activities or if they don’t bear interest, they are referred to as operating assets or operating liabilities.
Why is OWC Important?
It is a crucial indicator of a company’s liquidity. It measures the current assets and current liabilities used in the daily operations of a company. Working capital has an impact on a variety of corporate operations, including paying vendors and employees, keeping the lights on, and planning for long-term, sustainable growth. Working capital, in a nutshell, is the cash on hand to pay your immediate, short-term obligations.
If a debt does not have interest attached to it, the total liabilities are reduced. Securities are investment items whose value is speculative and uncertain; hence, they are deducted from assets. A corporation may need to change its strategy if OWC is negative. A corporation that has sufficient working capital (i.e., positive value) is able to finance both its ongoing operations and its expansion plans.
How to Calculate Operating Working Capital (OWC)
Formula
It is calculated using the following formula: OWC = (Assets – Cash and Securities) – (Liabilities – Non-interest liabilities).
Accounts Receivable plus Inventory plus Work in Progress minus Accounts Payable equals OWC.
Example Calculation
For example, consider the following calculation:
| Accounts Receivables | $50 |
| Inventory | $80 |
| Prepaid Expenses | $20 |
| Operating Current Assets | $150 |
| Accounts Payable | $35 |
| Accrued Expenses | $15 |
| Deferred Revenue | $10 |
| Operating Current Liabilities | $60 |
| Operating Working Capital | $90 |
Is working capital the same as operating capital?
Working capital is also known as operating capital and there is no difference. It shows the ability of a company to fulfill its daily monetary demands.
Net Working Capital vs Operating Working Capital
While net working capital considers all assets and liabilities, OWC focuses more on daily operations. Because it reflects the cash and other current assets a firm must spend in running and expanding its business, net working capital is more thorough.