Operating Working Capital =
Accounts Receivable + Inventory + Work in Progress - Accounts Payable


Cash is excluded from Operating Working Capital as it is considered as a Non-Operating Asset. Whilst cash is a 'Current Asset', the decision to hold cash is not directly related to operations.

The moment cash is used to purchase items for a company’s operations, it becomes an operating asset and is included in the OWC calculation.

For example: if a business has cash and uses it to purchase materials for product production, then the materials would be included in the OWC calculation as ‘Work in Progress’. Cash is not included in the calculation prior to its transformation into an Operating Asset because a business could decide to build cash for the purpose of a future transaction.

In this case, the business's operational position has not fundamentally changed, however if you included cash in the calculation for OWC, it would falsely appear that operating efficiency had increased.

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