Working Capital

Operating capital: capital used in daily operations of a business
Working capital: includes inventory, cash, raw materials, and A/R
Net Operating Working capital: measure operating liquidity of a business

NWC = CA - CL
NOWC = (CA - Cash) - CL
NWCInv (for calculating FCF) = does not include cash, cash equivalent, notes payable and current portion of debt

CA are Inventory, A/R, Prepaid expense
-- Cash, marketable securities are considered non-operating assets, not included in CA
CL is A/P, Accruals, non interesting bearing liabilities
-- Notes payable is not included in CL


When finding the net increase in working capital for the purpose of calculating free cash flow, we define working capital to exclude cash and cash equivalents as well as notes payable and the current portion of long-term debt. Cash and cash equivalents are excluded because a change in cash is what we are trying to explain. Notes payable and the current portion of long-term debt are excluded because they are liabilities with explicit interest costs that make them financing items rather than operating items.