Operating current liabilities minus Operating Current Assets is referred to as Operating Working Capital (OWC). When assets or liabilities are employed in the regular course of business or if they don’t bear interest, they are referred to as operating assets or liabilities. 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 do you calculate operating working capital (OWC)?
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.
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?
While net working capital considers all assets and liabilities, operating working capital focuses more on daily operations. Because it reflects the cash and other current assets a firm must expend in running and expanding its business, net working capital is more thorough.
