Current and long-term business financial standings are among the most important things to evaluate to help determine how successful operations are and make necessary adjustments. Operating working capital (OWC) is one of the things you must understand to assess your financial performance.
What Is OWC?
This measures an organization’s operating assets and liabilities used to facilitate its day-to-day operations that are not interest-bearing. Operating assets are resources an organization uses for revenue generation while operating liabilities are non-interest-bearing liabilities or results from an organization’s operational activities like salaries.
A high OWC is good because it means a business can pay suppliers up-front, taking advantage of cash discounts. It also allows you to hold high inventory levels and have extended customer terms.
The simplest way to calculate OWC is to subtract operational liabilities from operational assets.
OWC= Operating current assets – operating current liabilities
Short-term debts and cash are not included in this calculation. That is because cash is considered a non-operating asset.
Positive And Negative OWC
A positive operating working capital means an organization’s cash is tied up, and the organization can invest in future development. It indicates on-time and responsible pay-off by the company, which will help boost its corporate credit rating.
A negative OWC shows that the organization is sourcing short-term funding or does not have adequate long-term facilities to sustain its long-term debt.
It also means that the organization’s current liabilities are higher than current assets, making it more prone to late payments and borrowing. In the long run, that affects its credit because it will develop a lower corporate credit rating.
