Brief Definition

Changes in operating working capital (OWC) refer to the variations in the short-term assets and liabilities used in a company’s day-to-day operations. Operating working capital typically includes current assets such as accounts receivable, inventory, and current liabilities like accounts payable.

Further Explanation

Changes in operating working capital (OWC) refer to the variations in the short-term assets and liabilities used in a company’s day-to-day operations. Operating working capital typically includes current assets such as accounts receivable, inventory, and current liabilities like accounts payable. The changes in these components reflect the net cash effect of a company’s operational activities on its cash flow.

Example:
Accounts Receivable: Money owed to the company by its customers. An increase means more sales on credit, while a decrease indicates better cash collection.
If a company’s accounts receivable increases from $10,000 to $15,000, it means the company has more credit sales that are yet to be collected.
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Inventory: Goods and materials that a company holds for the purpose of resale. An increase suggests more stockpiling, while a decrease indicates higher sales or lower production.
If inventory levels drop from $50,000 to $40,000, the company may have sold more products or reduced its purchases.
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Accounts Payable: Money the company owes to its suppliers. An increase means the company is delaying payments, while a decrease suggests faster payments to suppliers.
If accounts payable increases from $5,000 to $8,000, the company might be taking longer to pay its suppliers.
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Other Current Assets and Liabilities: This includes various other short-term assets and liabilities like prepaid expenses and accrued expenses.
A rise in prepaid expenses from $2,000 to $3,000 means the company has paid more in advance for services or goods to be received later.