We are going to look at working capital versus operating working capital.

Let's start by looking at working capital.

Here we have a balance sheet and in particular we have highlighted current assets and current liabilities.

In looking at working capital. Working capital asks can accompany pay its bills.

So here we might define bills as current liabilities or accounts payable, amounts you owe your suppliers.

Can the company meet those bills? Well, if we assume that current assets can be used to pay the current liabilities then in this case yes they can.

The current assets are greater than the current liabilities.

If you think what's in the current assets, you might have cash, fantastic we can use that for bills.You've got inventory which you'll sell and you could use the resulting cash to pay bills and you've got accounts receivable, which is just cash that your customers owe you.

So if a company has current assets greater than its current liabilities, then that means it's working capital is positive and they can meet their bills.

Now that's slightly different to operating working capital. Here, we've got a similar balance sheet, but we've excluded cash from the current assets and we are focusing now on current operational assets.

What we're going to say with operating working capital is ask how much cash is tied up in operations? So current operational assets that has some cash tied up in it, cash tied up as inventory and cash tied up as accounts receivable, as in my customers have got my cash.

Now those two together inventory and accounts receivable, they constitute cash tied up that needs funding.

So we might have to go to the bank and say we've got lots of cash tied up. Can you please give me some funding I.e. we require cash.

But we have a free source of funding on the balance sheet and that's our current operational liabilities. Let's assume that that's just accounts payable, money we owe our suppliers. Well fantastic if I owe my suppliers, that means I've technically got my suppliers cash. I can use that to help fund the current operational assets the cash tied up. So if your current operational assets are greater than your current operational liabilities, then that means you've got positive operating working capital and that will require some funding i.e. it requires cash.

Why? Because the current operational assets are slightly bigger than the current operational liabilities, then we still need to go to maybe the bank and ask to borrow a little bit of money to make up the difference.

Compare that with a different scenario, where your current operational assets remember inventory and accounts receivable are slightly lower than your current operational liabilities your accounts payable. Let's say I've got 30 of accounts payable and only 20 of current operational assets.

That's fantastic. I've got a free source of funding of 30, and I've only got 20 of cash actually tied up in current operational assets brilliant. I've got 10 of cash or funding left over. This is a situation of negative operating working capital and that provides some free funding i.e. cash to the rest of the business.