Let's remind ourselves what operating working capital is Operating working capital includes current assets and current liabilities that are operating in nature So the calculation for operating working capital or OWC is operating current assets less operating current liabilities What does this really mean? Well operating working capital means the amount of cash you've got tied up in your operations So I might have items tied up in current assets such as inventory and accounts receivable (cash tied up) And my current liabilities; operating current liabilities such as accounts payable, that provides me with the funding So my operating balance sheet items such as accounts receivable, inventory, accounts payable Altogether, OWC measures funds needed to maintain operations The funds that are tied up in accounts receivable need to be funded The funds tied up in inventory (in my warehouse) need to be funded And luckily a little source of that is accounts payable, so we can subtract that off our funding needed Where can we get that funding from? We can look for financing balance sheet items, these provide funds for operating working capital or OWC These will include things like cash, debt obligations, equity etc Let's look at some examples of how operating working capital can change the funding needs of a company In example one, we've got a company here that's bought some inventory. So inventory 1,000 That's cash tied up of a 1,000, we've got no accounts receivable and then they subtract off no accounts payable Their operating working capital is 1,000 and they thus have a funding requirement of 1,000 That is positive OWC It requires funds to be invested and this is a very common scenario In example two, the company has bought some inventory but it hasn't yet paid for it So it bought inventory of a 1,000 and owes a 1,000 to its suppliers (accounts payable 1,000) So we take inventory plus accounts receivable (that's 1,000) subtract off your accounts payable and you get to operating working capital of 0 Fantastic! Your 0 OWC requires no funds to be invested in the business This is a desirable position for any company to be in If we look at example 3, slightly different again This company may have bought some inventory and sold it again (so inventory is zero) Accounts receivable is zero. The customers who bought the inventory (they paid for it), so nothing there So no cash is tied up in inventory, no cash is tied up in accounts receivable But we still haven't paid the supplier, so accounts payable is a 1,000 This is great! No cash tied up in inventory, no cash tied up in accounts receivable and we're actually tying up our suppliers cash (we've got a 1,000 of their cash) Fantastic, this is negative operating working capital This actually provides funds to the rest of the business and this is a highly desirable position to be If you look at example 4, they've got accounts receivable of 2,500 (so cash tied up there) That requires funding of 2,500 but hang on, we've got some accounts payable providing some free funding there So subtract off that 1,000, to get to operating working capital of positive 1,500 Again, we go back to the positive OWC. It requires funds to be invested, a common scenario