Operating working capital
AccountingThe operating current assets a business ties up, less the operating current liabilities that fund it.
Also written: net working capital, OWC, working capital
Operating working capital is receivables plus inventory plus prepaid expenses, less payables and accrued expenses. The word operating is doing real work: cash and debt are deliberately excluded, because they are financing items rather than a consequence of trading.
It measures how much money the business has to leave on the table to operate. A company that sells on 60 day terms and holds 90 days of inventory has funded three to five months of activity before a customer pays. That funding has to come from somewhere, and if suppliers are not providing it, the shareholders or the lenders are.
The change in working capital, not its level, is what hits cash flow. Growth consumes cash because receivables and inventory scale with revenue, which is exactly why a fast growing, profitable company can run out of money. Contraction releases cash, which is why a business in decline can look cash generative right up until it fails.
Excluding cash matters for a second reason. Cash is already handled in the enterprise to equity bridge, so including it in working capital double counts it and blurs the operating question with the financing one.
Worked example
A distributor has receivables of 200, inventory of 150 and payables of 120, so operating working capital is 230.
Revenue grows 50% and all three scale with it: receivables 300, inventory 225, payables 180, so working capital becomes 345. The 115 increase is a cash outflow that year, even though the company was profitable throughout.
Receivables and inventory are money the business has spent or earned but does not yet hold. Payables are the part suppliers are funding.