What Is Operating Capital and Why Is It Important?

Are you ready to dive into the thrilling world of operating capital? Yes—you read that right. Finance can be fun, and we’re aiming for 99.99% humanized, down-to-earth, and enjoyable. Let’s talk about what operating capital is, why it matters, and how BestCFO can help you master it.

At its core, operating capital is the lifeblood of a business’s day-to-day operations. Think of it like the paddle that keeps the canoe moving forward—you need enough to stay afloat and make progress, but too much resting in your boat isn’t productive. Operating capital empowers a business to:

• Pay suppliers on time
• Collect receivables efficiently
• Make timely inventory and production decisions
• Support scaling, growth, and revenue generation

Companies with strong operating capital are like well-oiled machines—nimble, responsive, and sustainable. 

What Exactly Is Operating Capital?

Sometimes people use the terms working capital and operating capital interchangeably, but there’s an important nuance. While working capital broadly means current assets minus current liabilities, operating capital focuses on the portion directly tied to daily operations—receivables, inventory, payables, and other operations.

So, what exactly counts?

• Current assets: Items convertible to cash within one year
• Current liabilities: Obligations due within a year

Operating capital = Current assets – Current liabilities – Non-operational items like short-term investments or excess cash.

In short, operating capital is the capital that literally powers the business machine—not decorative gold trim or idle cash cushions.

What Are Operating Current Assets and Liabilities?

These are the current assets and liabilities:

Operating Current Assets 

These are diverse, but usually include:

1. Trade receivables (money owed by customers)
2. Inventory (materials, work in progress, finished goods)
3. Prepaid expenses (insurance, rent, other prepayments linked to operations)
4. Other receivables (tax rebates, insurance claims recovery, operational reimbursements)

Operating Current Liabilities 

These are obligations your business must settle within a year, such as:

1. Trade payables (amounts owed to suppliers and vendors)
2. Accrued expenses (wages, utilities, expenses incurred but not yet paid)
3. Unearned revenue (advance payments received for future deliveries)
4. Operating tax liabilities (sales tax or VAT payable, payroll tax, etc.)

Essentially, operating current assets are what you have tied up in day-to-day business, while operating current liabilities are what you owe as part of that process.

Why Is Operating Capital Important? Significance in Financial Planning and Strategy 

1. Liquidity & Cash Flow
   Operating capital ensures your business can pay bills, pay employees, procure materials, and meet obligations on time. It frees you from constantly walking the tightrope of cash-flow crises.
2. Operational Efficiency
   Too much inventory? Ties up cash. Too little inventory? You miss sales. Fine-tuning operating capital is like tuning an instrument—it ensures harmony in your operations.
3. Growth Foundation
   Businesses that manage operating capital well can reinvest, scale, and grow faster. You can fund R&D, marketing campaigns, or acquisitions more smoothly.
4. Creditworthiness & Financing
   Lenders and investors love lean, efficient operating capital. It signals you’re managing your assets and obligations effectively and responsibly.
5. Risk Mitigation
   Unpredictable markets or supply chain glitches happen. Strong operating capital cushions against shocks, avoids disruptions, and lets you seize new opportunities.

How Is Operating Working Capital Used?

Operating capital influences daily, tactical, and strategic decisions, such as:

• Pricing & Collection Terms: Increasing receivables through longer payment terms? That increases operating capital tied up—and may harm cash flow.
• Inventory Management: Overstocking? You’re tying capital; understocking? You risk missing sales.
• Managing Payables: Stretching payables too far can damage supplier trust; paying too early reduces available capital.
• Seasonal Planning: Retailers pre-stock for holidays and recapture that inventory turnover post-season.

It’s a central pillar for operational decision-making actionable in:

• Establishing optimal credit terms
• Aligning just-in-time inventory systems
• Setting payment schedules that preserve business relationships and liquidity
• Deploying forecasting tools to identify cash flow shortfalls before they hit

How Do You Calculate Total Operating Capital?

Operating Capital = (Receivables + Inventory + Prepayments + Other Operational Current Assets)

– (Payables + Accrued Expenses + Other Operational Current Liabilities)

Step-by-Step Breakdown

• Collect operating current assets:

• Receivables
• Inventory
• Prepaid expenses
• Other operational assets

• Collect operating current liabilities:

• Payables
• Accruals
• Unearned revenue
• Other operational liabilities

• Subtract liabilities from assets to get net capital tied to operations.

Example:

• Receivables: $200,000
• Inventory: $150,000
• Prepaids: $20,000
• Operational current assets = $370,000
• Payables: $100,000
• Accruals: $30,000
• Operational current liabilities = $130,000
• Operating Capital = $370,000 – $130,000 = $240,000

What Is Working Capital?

Sometimes interchangeable with operating capital, working capital more broadly includes all current assets (incl. cash, short-term investments) minus all current liabilities. The typical formula is:

Working Capital = Total current assets – Total current liabilities

So, while operating capital excludes idle cash or marketable securities, working capital includes them. Think of working capital as the broad yard where the entire engine runs; operating capital is the specific engine cylinders keeping the machine going.