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How is Operating Working Capital calculated?
How is Operating Working Capital calculated?

Operating Working Capital is a key measure of liquidity within a business. Find the equation that Fathom uses to calculate OWC.

Updated over a year ago

Contents

Formula for Operating Working Capital

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

Cash is excluded from Operating Working Capital (OWC) 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.

When 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 uses cash 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 transforming into an Operating Asset because a business could decide to build cash for a future transaction.


If you included cash in the calculation for OWC before it became an Operating Asset, it would falsely appear that operating efficiency had increased.

Cash Conversion Cycle

While the Cash Conversion Cycle formula appears similar to the Operating Working Capital formula, their measurements differ.

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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