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Chapter 11Operating Working Capital

The operating working capital schedule serves as a bridge between the balance sheet and cash flow statement. While operating working capital line items are balance sheet line items (current assets and current liabilities), it is the year-to-year changes in these line items that affect cash flow. There is generally no operating working capital schedule in an annual report, so as analysts we need to identify and create our own schedule. The goals of creating the working capital schedule are as follows:

1. To identify the appropriate line items needed for operating working capital
2. To project operating working capital line items
3. To link the operating working capital line items into the cash flow statement

We can use the pro-forma balance sheet to identify the proper current asset and current liability line items. Please review the “Working Capital” section in Chapter 2 for a refresher on operating working capital line items.

See Exhibit 9.15 for the pro-forma balance sheet. Operating working capital is a subset of current assets and current liabilities. So starting from the current liabilities at the top of the balance sheet, we know cash is not included in operating working capital. The next three line items, “Receivables,” “Inventories,” and “Prepaid expenses and other current assets,” are standard operating working capital line items. The next line item, “Deferred income taxes and receivables,” was slightly perplexing. Often, a deferred tax ...