How to Calculate Operating Working Capital (Formula & Example)

I’ve worked with many entrepreneurs who wanted a quick formula for OWC so they could feel more in control. Frankly, a little math can go a long way in giving you peace of mind. Before we crunch numbers, though, let’s have a quick refresher on the difference between short-term assets and short-term liabilities.

• Short-Term Assets: Things you can turn into cash (or use) in a year or less (accounts receivable, inventory, plus that portion of cash for day-to-day needs).
• Short-Term Liabilities: Debts you must pay within a year (accounts payable, wages, immediate loan payments, etc.).

And now for the finer details:

OWC Formula

OWC is often calculated as:

Operating Working Capital = (Accounts Receivable + Inventory) – (Accounts Payable)

Notice I didn’t list every possible asset or liability. That’s because OWC focuses on assets and liabilities related to your core operations. A broader working capital formula might include cash and other short-term items, but operating working capital tries to isolate only the essentials of your production cycle – like the money locked up in inventory or the amount your customers owe you.

For those who want to see how OWC might relate to the working capital ratio or the net working capital figure, you can cross-reference those formulas, but keep in mind OWC is more selective in what it considers.

Example Calculation

Let’s imagine you run a small craft brewery. Here are some simplified figures:

• Accounts Receivable (AR): $30,000 (money owed by restaurants that just stocked your craft beers)
• Inventory: $20,000 (grain, hops, packaging, plus a bit of finished product)
• Accounts Payable (AP): $25,000 (money you owe your suppliers for ingredients and bottling supplies)

Using the OWC formula:

OWC = (AR + Inventory) – AP OWC = (30,000 + 20,000) – 25,000 OWC = 50,000 – 25,000 OWC = 25,000

So, you have $25,000 tied up in essential day-to-day operations. This figure can guide you in deciding if you need more capital to handle an uptick in demand or if you’ve got enough on hand to manage production seamlessly.

OWC-to-Sales Ratio Analysis

Another angle is the OWC-to-Sales Ratio, which is calculated by taking your OWC (like the $25,000 we calculated) and dividing it by your total sales over a certain period. If your annual sales are $250,000, then your OWC-to-Sales Ratio is 10%.

This ratio can show how aggressively cash is being used in your core operations relative to your revenue. Too high of a ratio might mean you’re tying up too much money in inventory or not collecting payments quickly. Too low could indicate you’re not holding enough buffer to manage day-to-day volatility.

Operating Working Capital vs. Total Working Capital

Even though both OWC and Total Working Capital (sometimes called net working capital) help you gauge liquidity, they’re not one and the same. Let’s break it down clearly:

Factor	Operating Working Capital (OWC)	Total Working Capital (NWC)
Focus	Related to core operations (inventory, receivables, payables)	Includes all short-term assets and liabilities (cash, marketable securities, short-term loans, etc.)
Calculation Scope	More targeted to the daily operational cycle	Broader measure of a company’s entire short-term financial situation
Inclusion of Cash	Considers only the part of cash needed for day-to-day tasks	Counts all cash and equivalents as part of the company’s short-term assets
Main Purpose	Helps you see how much money is tied up in production and day-to-day transactions	Gives an overall snapshot of the business’s short-term financial health

Both metrics matter, but OWC is often more closely watched by folks wanting to ensure that their operations are running efficiently – like making sure production never stops because they ran out of supplies or got short on payroll. Meanwhile, total working capital gives you a broader view of financial stability.

Learn more: Working Capital vs NET Working Capital

Why Operating Working Capital Is Important for Businesses

Let’s be honest: a lot of business owners don’t leap for joy when discussing working capital. Yet, it’s so vital that neglecting it can cause major headaches – or even threaten a company’s survival. OWC is especially critical because it hits right at the heart of daily operations.

Helps Measure Short-Term Liquidity

Liquidity isn’t just a fancy term we throw around in meetings. It’s your ability to pay bills on time, keep shelves stocked, and maintain employee morale by sending out paychecks without delay. If your operating working capital is low, you might find yourself short on cash exactly when you need it most.

Impacts Business Growth & Investment

Thinking about expanding? Maybe you’d like to open a second location or hire more staff. That’s fantastic, but if your OWC is stretched too thin, you might not have the breathing room to comfortably take those steps. Potential investors or lenders will also want to see solid liquidity indicators before they hand you additional funds.

And speaking of additional funds, that’s where we at Eboost Partners come in. Our loans range from $5,000 to $2 million, with repayment terms up to 24 months, and you can choose either automatic daily or weekly payments. These financing solutions can be a straightforward way to give your OWC a boost, whether you’re dealing with seasonal demand swings or ramping up inventory for a major product launch.

Affects Cash Flow Management

Sometimes you’ll see businesses that generate decent overall cash flow but still struggle day to day. How does that happen? Often, it’s because their OWC is off-balance. They might be profitable on paper but can’t handle short-term obligations due to payment timing issues.

It’s a classic pinch: your big clients pay late, your suppliers want money immediately, and payroll is always around the corner. By keeping an eye on your OWC, you can manage those ebbs and flows more confidently.

Ways to Improve Operating Working Capital

You might be thinking, “That’s all well and good, but how do I actually improve my day-to-day liquidity?” You know what? That’s the million-dollar question – and there are several angles to consider.

1. Tighten Accounts Receivable:
   Encourage prompt payments with small discounts or easier payment options. Some folks use digital invoices with automated reminders to cut down on delays. Another approach could involve credit checks to ensure you’re not extending payment terms to chronically late payers. (Yes, it might feel strict, but your operating budget will thank you.)
2. Manage Inventory Wisely:
   If you’re sitting on mountains of slow-moving stock, you’re tying up money you could use for other things. On the other hand, running out of key items can grind sales to a halt. Balancing these two extremes is where good working capital management comes in. Think about using forecasting tools or simple reorder triggers to keep inventory at the sweet spot.
3. Negotiate Favorable Payment Terms:
   Don’t hesitate to work with suppliers on flexible terms. If you can extend your payables by a couple of weeks or synchronize them better with your receivables, that can quickly improve OWC. It doesn’t hurt to reach out and see if your suppliers are open to a more relaxed schedule.
4. Consider Accessible Financing:
   Sometimes a loan can be the difference between hustling to meet everyday demands or having the freedom to grow at your own pace. While some folks worry about interest rates or repayment schedules, having a safety net can actually save you from costlier problems down the line. Many business owners ask me whether a PayPal working capital loan might be right for them. It really depends on your specifics, but there are alternatives (like our loans at Eboost Partners) that can be tailored to your circumstances – even if you’ve got some blemishes on your credit history.
5. Speed Up Your Sales Cycle:
   If your products or services can be delivered faster or your sales process can be streamlined, you’ll convert inventory into revenue more quickly. A faster cycle means less time waiting for money to roll back in, which boosts your OWC.
6. Stay Mindful of Seasonal Effects:
   If your business is seasonal (like a holiday shop or a summer travel agency), you might find OWC is flush in peak season and strained in off-season. Plan ahead by securing financing to cover those fluctuations. This can also mean adjusting staff hours or inventory ordering in quieter months.
7. Watch for Deferred Revenue
   If you accept payments in advance for products or services that haven’t been delivered yet, you’ve got what’s known as deferred revenue. You might ask, “Is deferred revenue part of working capital?” It often appears on the liability side (you owe the product or service), and it influences how much of your cash is actually available to use. By carefully managing that balance, you can avoid surprises.
8. Understand the Distinctions
   Stay aware of the difference between working capital and net working capital, or how is working capital used. You may also run into specific queries like “Does working capital include cash?” or “How much working capital do I need?” – the answers can vary depending on which type of working capital you’re focusing on.

Improving OWC is not always about gigantic changes. Sometimes small but strategic adjustments can free up thousands of dollars.

Where Eboost Partners Can Support Your Working Capital Needs

If you’re reading this and thinking you could use a little breathing room, we at Eboost Partners are here to help. We specialize in funding solutions of $5,000 up to $2 million. Our repayment terms can stretch to 24 months, and we offer automatic daily or weekly payment schedules for your convenience.

For many small businesses, especially those experiencing a crunch or anticipating a growth opportunity, a short-term infusion of capital can relieve a lot of stress. It could help you make a large inventory purchase at a bulk discount, fill a gap caused by late customer payments, or even enable you to seize a new project without worrying about immediate cash constraints.

And we don’t just hand you the funds and vanish. If you need insights on how can working capital be improved or whether negative working capital might pose a real threat to your business, we offer valuable advice tailored to your situation.

Let’s Recap

• OWC zeroes in on the stuff that keeps your day-to-day operations humming.
• Calculating it using (Accounts Receivable + Inventory) – Accounts Payable gives you a powerful snapshot of how well you’re managing your ongoing financial obligations and short-term cash cycle.
• Improving OWC often hinges on better receivables, balanced inventory, favorable supplier terms, and sensible financing.
• Eboost Partners can help you handle these aspects by providing loans up to $2 million with flexible repayment.

Now, I’m sure you have more questions – everyone does. Feel free to reach out to Eboost Partners. We’ll walk you through potential funding options and share practical ideas that go beyond mere spreadsheets. After all, it’s your passion and hard work that built your business; the last thing you need is a shortage of capital holding you back.

By the way, if you’d like to read more or talk about specific scenarios – like the working capital formula or the working capital turnover – just drop us a note or explore our resources. The more clarity you have, the more confidently you can make decisions that propel your business forward.

Thank you for sticking with me through this conversation. Operating working capital may not be the most glamorous topic, but once you see how it directly influences your everyday finances and growth possibilities, it’s hard to ignore. And if you ever need that extra push in the form of quick and reliable funding, we’re right here to help.