Operating working capital, or OWC, is the measure of liquidity in a business. Net working capital, or NWC, is the result of all assets held by a company minus all outstanding liabilities. Operating working capital is all assets, minus cash and securities, minus all short term, non-interest debts.
Operating working capital is the measure of all long term assets versus all long term liabilities. The formula for calculating operating working capital is: OWC = (Assets - Cash and Securities) - (Liabilities - Non-interest liabilities). If interest is not charged on a debt, it is subtracted from the total liabilities. Securities are investment products that are subtracted from assets, as their value is speculative and not definite. A negative operating working capital is a sign the company may need to adjust its strategy.
Net working capital is different from operating working capital. Net working capital focuses more on the now, rather than the long term. The formula for calculating net working capital is: NWC = total assets - total liabilities. Unlike operating working capital, you do not need to remove cash, securities or non-interest liabilities. This shows the current liquidity of a company for the coming quarter. A company that has a negative net working capital may need to raise capital to continue operations.
In some instances, a negative operating working capital will be realized. This will show that the business does not have the long term assets to contain long term debts. A business with negative operating working capital will need to adjust profits and liabilities to regain a positive outcome for the future. Even if the net working capital is positive, the company needs to look at cost cutting measures to regain a positive operating working capital.
If a business has a negative net working capital figure, it does not have the assets to pay its debts. Companies facing a negative net working capital may need to raise capital from investments, cut costs or raise prices. A negative net working capital shows that a company is struggling to meet costs. Prolonged periods of negative net working capital may lead to the closure of the business and liquidation of assets to pay creditors.