In this workout, we're being asked to calculate operating working capital Underneath the question, we can see we've been provided with a balance sheet exert In order to answer this, I need to try and identify which items are operating and which items are current in nature So let's through the current assets to start with Well cash, definitely current because it's in the current assets. But it's not operating, that's a financing item so I'm going to ignore that Inventory, inventory is operating and it is current in nature. That's my first item I'm going to include Cash equivalents is like cash, it's not operating in nature, that's going to financing, so we can ignore that Accounts receivable, is it operating? Well that's my customers paying me my bills I've offered them a credit period, they've then paid me Without them I definitely couldn't run a business. Definitely operating in nature The last current asset is prepaid expenses, this is where I have paid a bill in advance and I'm going to enjoy the benefit of that when I get to use the service (whatever it is) They do tend to be operating in nature, so I've got three items there: inventory, accounts receivable and prepaid expenses So I've started my answer underneath I've taken the inventory figure, the accounts recoverable figure and a pre-paid expenses figure Now remember for operating working capital, I need to subtract off any current liabilities that I think are operating in nature. Let's go see if we can find those So current liabilities, I can see there are four here, need to discuss if they are operating Well notes payable and short term portion of long debt, they are both sources of finance Long term debt, notes payable, they're both just debt instruments So although they are current in nature, they're not operating in nature Accounts payable, accounts payable is me looking to pay my suppliers Definitely current in nature and definitely operating, I couldn't operating without them suppling me And deferred revenue, this is where customers have paid me money in advance of getting their product or their service It involves customers, must be operating So they are two extra items to include in our operating working capital calculation So in order now to get my operating working capital, I need to take the top three: inventory, accounts receivable and prepaid expenses And I need to subtract the bottom two That now tells me I've got operating working capital of 891 Put another way, I've got tied up cash of 891 and that will need funding from somewhere