Formula for Operating Working Capital

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

Cash is excluded from Operating Working Capital as it is considered 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.

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 before its transformation into an Operating Asset because a business could decide to build cash for a future transaction.

In this case, the business's operational position has remained the same; however, if you included cash in the calculation for OWC, it would falsely appear that operating efficiency had increased.

Cash Conversion Cycle

While the Cash Conversion Cycle formula appears similar to the formula for Operating Working Capitals, their measurements are different.

The Cash Conversion Cycle measures the time between purchasing raw materials and collecting Accounts Receivable from customers. So, it measures how long until the cash invested in raw materials is received as cash revenue by the business.

Therefore, the Cash Conversion Cycle KPI is measured in days, as are the variables used in the formula.

Cash Conversion Cycle =
Accounts Receivable Days + Inventory Days + Work in Progress Days - Accounts Payable Days

Working Capital

When viewing the Balance Sheet in the Separation of Operations & Finances layout, 'Working Capital' is listed. While 'Working Capital' and 'Operating Working Capital' have similar names, the two metrics are calculated differently.

Working Capital follows the layout of the Balance Sheet and summarises the line items above it.

Working Capital =

Total Current Assets - Total Operating Liabilities

Additional knowledge & common questions:

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