Transparent method
The formula
Worked example
Example inputs
How to interpret the result
Two companies can show identical working capital and sit in completely different positions, because the subtraction says nothing about what the assets actually are. A dollar in a checking account and a dollar of inventory that hasn't sold in eight months count the same here, but only one of them can actually pay a bill next week.
Before you rely on it
What to check
Break the current-asset total apart. Cash and receivables you expect to collect are a different kind of cushion than inventory sitting on a shelf.
The common error
Where people go wrong with working capital calculator
Reading a healthy working-capital figure as proof of liquidity. A company can carry a large positive number built mostly from slow-moving stock and still miss payroll, because the figure measures accounting position, not the timing of actual cash.
Sensitivity evidence
How current assets changes the working capital
| Current assets | Working capital | Current ratio |
|---|---|---|
| $280,000 | $70,000 | 1.33× |
| $315,000 | $105,000 | 1.50× |
| $350,000worked example | $140,000 | 1.67× |
| $385,000 | $175,000 | 1.83× |
| $420,000 | $210,000 | 2.00× |
Every input, tested
Which input moves the working capital most
| Input | Tested from | To | Working capital at each end | Swing |
|---|---|---|---|---|
| Current assets | $315,000 | $385,000 | $105,000 to $175,000 | $70,000 (50%) |
| Current liabilities | $189,000 | $231,000 | $161,000 to $119,000 | $42,000 (30%) |
Two variables at once
Working capital by current assets and current liabilities
| Current assets \ Current liabilities | $168,000 | $210,000 | $252,000 |
|---|---|---|---|
| $280,000 | $112,000 | $70,000 | $28,000 |
| $315,000 | $147,000 | $105,000 | $63,000 |
| $350,000 | $182,000 | $140,000 | $98,000 |
| $385,000 | $217,000 | $175,000 | $133,000 |
| $420,000 | $252,000 | $210,000 | $168,000 |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Current assets | $350,000 |
| Current liabilities | $210,000 |
| Working capital | $140,000 |
| Current ratio | 1.67× |
Where the inputs come from
Current assets are cash, accounts receivable, inventory and other assets you expect to turn into cash within a year, and current liabilities are bills, short-term debt, accrued wages and taxes due within a year. Both come from the balance sheet on the same date. Treat receivables realistically: an invoice that is 120 days late may not be collectible, so consider writing it down before computing the figure.
When the result stops applying
The measure is a snapshot at one date and changes with seasonal swings. Timing matters more than the level, since a bill due tomorrow does not care about assets due in six months.
What to compare it with
Test liquidity more strictly with the quick ratio and cash ratio calculators, and see the current ratio page for the same idea as a ratio. The cash conversion cycle and working capital requirement pages show how much cash your operations tie up. A business that grows fast often needs more working capital, not less.
People also ask
Frequently asked questions
Is negative working capital always bad?
Not always. Businesses that collect from customers before paying suppliers, such as grocery chains, can run with negative working capital. It is risky for a company that sells on credit.
What is a good current ratio?
A ratio of about 1.5 to 2 is often considered healthy, while under 1 raises concern about paying short-term bills. The right level depends on the industry.
How do I increase working capital?
Collect receivables faster, negotiate longer supplier terms, reduce slow-moving inventory, or add long-term financing to fund current assets.