Financial Modeling Class

Operating Working Capital (OWC) Statement

Fall 2019
Bruce Tavel
 Operating Working Capital (OWC)
Working Capital = Current Assets – Current Liabilities
• Determines if cash coming due from our current assets will cover our current liabilities
coming due in next 12 months
• Money the firm has to “work with” short term. Feeds the Cash Statement.
• Money left over after you subtract current assets – current liabilities.
• OWC excludes cash and short term debt from its calculations
• It is a measure of near term liquidity and operating efficiency
• Positive OWC implies that a company can pay off its short term liabilities
• OWC is a bridge between the balance sheet statement and cash flow statement
• Line items include:
o Accounts receivable = obligations of customers (due from use of credit)
o Inventory = raw material, work in process inventory, finished goods inventory
o Prepaid expenses = insurance, rent, salary advances...
o Accounts payable = owed to suppliers (previously bought on credit)
o Accrued Expenses = owed to employees & others for services (e.g., salaries earned not yet paid)
o Income taxes payable = owed to the government, not yet paid
 OWC : Days concept
• “Days” – a measure used to track how well we are collecting receivables or paying payables;
simply a proportion using the relevant income line item
E.g.,
average receivable days = ($ accounts receivable/revenue)*360
average payable days = ($ accounts payable/COGS)*360
average expense days =($ prepaid expenses/SG&A)*360
average inventory days = ($ inventory/COGS)*360
• Days receivable example
Calculate a percent of the accounts’ outstanding balance over the related income line
item for the period; multiply by 360 to yield days until item is converted into cash
accounts receivable = 2,500 revenue = 10,000
then days = (2,500/10,000)*360 = .25*360 = 90 days until cash receipt
 OWC: Projecting OWC and Changes in OWC
• To project OWC use last year’s days, for each line item, and reverse-engineer the
standard days formula; i.e.,
$ accounts receivable(t) = ( projected days receivable(t) /360 ) * projected revenue(t)
$ Inventory(t) = ( projected inventory turnover days(t) / 360)*projected COGS(t)

• Computing Changes in OWC: the link to cash flow statement

current asset increase (+) => cash flow decrease (-) an outflow
current asset decrease (-) => cash flow increase (+) an inflow
current liability increase (+) => cash flow increase (+) an inflow
current liability decrease (-) => cash flow decrease (-) an outflow
Operating Working Capital (OWC): Walmart (WMT): Making Projections

Open WMT 2012 annual report ( Blackboard Content ) see page 33

Historic Values
• Note WMT Current Assets: Receivables, Inventories, Prepaid expenses
e.g., 2012 Receivables = $ 5,937
• Hard code these line items into WMT Model Template, Balance Sheet (link into OWC statement)
• Assume currents assets of discontinued operations are extraordinary, not to be included in
OWC
• Note WMT Current Liabilities: Accounts payable, Accrued liabilities, Accrued income tax (tax
owed but not yet paid); e.g., 2012 Accounts payable = $ 36,608
• Hard code these line items into WMT Model Template Balance Sheet (link into OWC statement)
• Compute historical days for all line items; e.g., 2012 Days Receivable = AVG(2012 + 2011
Receivables)/2012 Revenue * 360 etc.
• We use Pignataro Template relationships of Revenue & Accounts receivables, COGS & Accounts
payable, COGS & inventories, SG&A & Accrued liabilities, etc.
 OWC: Walmart (WMT): Making Projections (cont’d)
• Projecting OWC
• We use the 2012 Days computed as a forecast of each line item Days for next year, following
year, etc.
• Then: 2013 Projected Line Item = 2013 Projected Days * 2013 Projected Base Line Item / 360
• Where 2013 Projected Base Line Item (Revenue, COGS, SG&A, Income Tax Expense) is from link
to Income statement
• OWC and Cash Flow Statement
• OWC statement is a bridge between Balance Sheet and Cash Flow line items
• OWC is a net asset, hence if OWC(t) – OWC(t-1) > 0 then change in Cash Flow (-) outflow
If OWC(t) – OWC(t-1) < 0 then change in Cash Flow (+) inflow
• Consider WMT 2013E, $ 891.3 = ∆OWC(t) = OWC(t-1) – OWC(t)
= (CA(t-1) - CL(t-1) ) – ( CA(t) – CL(t) )
From a change in cash flow perspective:
• If > 0 then cash inflow If < 0 then cash outflow
• You can now link the Changes in OWC into the WMT Model Template Cash Statement (CFO)