Question

Q1. Should a firm have as much as possible OCL(operating current liabilities) and as little as possible OCA(operating current assets)? Briefly explain.

Answer 1

Operating Current Assets means sort term assets that are required for keeping the operations going. These are expected to be settled within next 12 months. Operating current assets include Cash, Account Receivable and Inventory. It does not include short term investments as they are h kept for sale and not for operations.

Operating Current Liabilities - means short term liabilities arising out of operations. These are expected to be settled within next 12 months. Operating Current Liabilities includes account payables and accruals. It does not include any loan or interest payment.

Now Net Operating Working Capital (NOWC) = Operating Current Assets - Operating Current Liabilities

Thus keeping as high as possible Operating Current Liabilities and as low as possible Operating Current Assets would keep Net Operating Working Capital low. A positive NOWC indicates sufficient liquidity is there to pay off current operating liabilities by operating current assets. So it is more desirable to have as high as possible Operating Current Assets and as low as possible Operating Current Liabilities that would keep Net Operating Working Capital high.