Key Takeaways
- Working Capital Basics: It’s the difference between current assets and current liabilities, giving you a snapshot of short-term financial health.
- Cash Inclusion: Standard net working capital includes cash; operating working capital often leaves it out to highlight core operational performance.
- Different Formulas, Different Insights: Net Working Capital is broader, while Operating Working Capital hones in on day-to-day operational needs.
- Reasons for Exclusion: Companies sometimes exclude cash to avoid skewed results if the cash isn’t actively used for daily operations.
- Negative Working Capital: This can be risky or part of a strategy, depending on how fast a business moves its inventory or collects receivables.
- Eboost Partners Support: If you need a boost for your small business – especially if working capital is tight – Eboost Partners offers funding from $5K to $2M, with convenient repayment terms.
Ever find yourself looking at your balance sheet and wondering, “Wait, do I count the cash in my bank as part of my working capital?” Honestly, you’re not alone. I’ve been chatting with small business owners across the country for years, and working capital questions pop up all the time. Here’s the thing: working capital seems straightforward, but it can get a little confusing when we drill down into the details – especially with cash. Let me share what I’ve learned along the way and how we at Eboost Partners approach these conversations.
In everyday business language, folks often say “working capital” when referring to cash on hand. However, there’s a bit more to it. Working capital is like your operational fuel, ensuring you can pay bills, handle inventory, and manage those unexpected hiccups that come with running a company. If you’ve ever had a vendor call you at the worst possible moment looking for payment, you know exactly what I mean.
Before we get deeper, I should also mention that at Eboost Partners, we don’t just help with affordable business loans (from $5K all the way up to $2M). We also love sharing know-how and plain-speaking advice on the trickier parts of small business finance. But let’s not get ahead of ourselves. Let’s start with the basics: what is working capital, really?
What Is Working Capital?
Working capital is essentially the difference between your company’s current assets and current liabilities. It measures your short-term financial health – kinda like a quick snapshot of whether you can cover your immediate obligations. If you’d like a fuller explanation, you can check out our comprehensive discussion on working capital for business or dig into how to calculate net working capital in our working capital formula resource. There, we detail different ways you might measure and manage your net working capital, which can vary depending on your specific business situation.
Does Working Capital Include Cash?
Now, the big question: Should your cash balance be tossed into the mix when you calculate working capital? The answer can be yes or no, depending on which version of working capital you’re referring to and the purpose behind your calculation.
- In the standard (or “total”) definition of working capital, you typically include cash and cash equivalents.
- In operating working capital (OWC), on the other hand, you usually exclude cash – especially if it’s not directly used to finance day-to-day operations.
Some owners keep it simple and always include cash. Others prefer focusing on operating capital because they want a more precise figure for how their operational cycle is doing without the extra cushion of idle money in the bank.
Working Capital Formula: With & Without Cash
Let’s explore the two most common forms: Standard Net Working Capital and operating working capital. You know what? I’ve seen small business owners trip up on this topic countless times, especially when they’re comparing financial statements or looking at an external resource that uses a formula they’re not used to. But don’t sweat it. Once you understand the logic behind each formula, you’ll see why some folks include cash and some don’t.
Standard Net Working Capital (NWC) Formula (Includes Cash)
Net Working Capital (NWC) is like the classic approach. It’s computed as:
NWC = (Current Assets) – (Current Liabilities)
In current assets, you’ll typically find:
- Cash & cash equivalents (like short-term marketable securities)
- Accounts receivable
- Inventory
- Prepaid expenses
On the other side, current liabilities might include:
- Accounts payable
- Short-term debt
- Accrued expenses
- Other payable items
Want the detailed breakdown of how to calculate working capital and get clarity on topics like negative working capital or how to handle deferred revenue net working capital? Check out our how to calculate working capital guide for more insight.
Operating Working Capital (OWC) Formula (Excludes Cash)
Operating working capital strips out cash on the asset side (and sometimes short-term debt on the liabilities side). It focuses on the assets and liabilities that are part of day-to-day operations:
OWC = (Current Assets – Cash & Cash Equivalents) – (Current Liabilities – Short-Term Debt)
This formula shows you what’s actively cycling through your business operations – inventory, receivables, payables, and so on. The idea is to see how effectively your operating assets are financing your daily needs. Folks who like this approach argue that cash isn’t always used in operations, especially if it’s held for emergencies or future growth.
Operating Working Capital vs. Total Working Capital
Below is a quick side-by-side comparison to clear up the differences:
| Factor | Operating Working Capital (OWC) | Total Working Capital (NWC) |
|---|---|---|
| Cash | Excluded from current assets (focuses on receivables, payables, inventory) | Included in current assets (captures full liquidity picture) |
| Short-Term Debt | Often removed from current liabilities to focus on trade financing | Typically includes all short-term liabilities |
| Purpose | Shows the core operational financial health | Offers a broader view of overall short-term liquidity |
| Use Cases | Analyzing day-to-day efficiency, planning for operational cycles | Assessing overall solvency, preparing for external financing or expansions |
| Impact of Surplus Cash | Surplus cash doesn’t affect this metric; it’s more about working capital management | Surplus cash increases NWC and signals strong liquidity |
If you’re curious about the difference between working capital and net working capital, or if you want to see how the working capital ratio fits into the mix, you might find our reference on net working capital helpful.
Why Cash May or May Not Be Included in WC
Some folks get annoyed by all this, claiming, “Why make it complicated? Just include everything.” But there’s a method behind the madness. Let me explain by highlighting a few reasons why you’d include or exclude cash in your calculation.
Say you’re planning your business’s finances for the next quarter. If you’ve got a big chunk of idle cash that you’re not planning to use for day-to-day operations, factoring it into your operational measurements might give you a false sense of security. Conversely, if you rely on that cash to cover unexpected shortfalls in payroll or inventory purchasing, it definitely belongs in the pot.
Reasons to Include Cash in WC
- It’s Readily Available: If your cash is on standby for paying bills, ordering supplies, or covering wages, it’s fair to say it’s part of your operational game plan.
- Broad Liquidity Overview: When you’re seeking financing – maybe a working capital loan bad credit scenario – you often want the biggest possible picture of your liquidity. Lenders sometimes want to see your raw cash position to assess risk.
- Improves Debt Calculations: Cash reduces net debt. Including it in NWC helps some analysts or stakeholders gauge your ability to meet short-term liabilities quickly.
Reasons to Exclude Cash in WC (OWC Perspective)
- Not Directly Tied to Operations: If your cash pile is earmarked for long-term investments or a rainy-day fund, it doesn’t actively fuel your daily operational cycle.
- Risk of Misleading Metrics: Including a large stash of cash in working capital might mask deeper challenges in your working capital management – such as slow-moving inventory or delayed receivables.
- Better Operational Focus: OWC strips things down. It helps you see if you’re profitable on your day-to-day tasks and if your core operations (without relying on bank reserves) are efficient.
Final Thoughts
In business, there’s no single magic bullet for measuring financial health. Net working capital and operating working capital each offer their own lens on liquidity. If you’re aiming to measure raw short-term solvency, include that cash. If you’re more curious about how your actual trade cycle is performing, you might keep it out.
Either way, you can’t fully separate working capital conversations from the larger topic of how your business is financed. You might be exploring new gear for your workshop, handling peak season in a retail shop, or looking at a PayPal working capital loan to get extra funds. At Eboost Partners, we get it – you want clarity, real-world advice, and a lending partner who doesn’t just see you as a number.
With our financing solutions ranging from $5K to $2M and repayment terms up to 24 months, we try to accommodate businesses in all sorts of scenarios. Need a short-term boost for your negative working capital? We’ve been there to help many companies navigate rough patches, bridging them into smoother waters. And to make your life easier, we’ve introduced automatic daily or weekly payments – a small shift that can relieve the mental load of big monthly bills.
You know what? If you’re scratching your head over how to improve your working capital turnover, or if you’ve been asking yourself, “How can working capital be improved without touching my emergency funds?” – reach out. I’d love to chat about where your business stands, figure out how we might help, and see if we can set you up with the right strategy (loan-based or otherwise).
Still have questions about how much working capital you need, whether deferred revenue is part of working capital, or how to handle working capital inventory fluctuations? I’m always here for a chat – because let’s face it, managing cash flow can be stressful enough without the confusion over formulas. If you’d like a clear plan, or if your small business simply needs that extra push through a rough patch, Eboost Partners is one call away. And if you’re reading this on an external site, feel free to swing by our website or give us a ring. We’d be happy to help with practical, down-to-earth advice – and yes, good financing options, too.
Because at the heart of it all, your small business goals matter. Let’s see how we can support you.
Resources
- SBA: Working Capital Management – https://www.sba.gov/
- Investopedia: Working Capital – https://www.investopedia.com/terms/w/workingcapital.asp
FAQs About Working Capital and Cash
Typically, yes. In standard Net Working Capital calculations, cash is part of current assets. It paints a broader picture of whether you can pay your short-term obligations.
But if you’re focusing on a more operational measure—like Operating Working Capital—you might exclude it to see how effectively your day-to-day activities fund themselves.
Some businesses exclude cash if they don’t rely on it for daily operations.
Maybe it’s set aside for expansion in six months or it’s a savings buffer for emergencies. Excluding such funds can be helpful if you want a clear look at how your trade cycle (inventory, payables, receivables) is really functioning.
Negative working capital can be daunting. It means you don’t have enough current assets to cover current liabilities. That’s not always a disaster—some big retailers leverage negative working capital strategies by moving inventory so fast they can pay vendors later with new cash from recent sales.
But for many small businesses, negative working capital is a warning sign. It may call for outside funding, like a working capital loan from a trusted partner such as Eboost Partners.
