What Is Working Capital?
Working capital is the money a business has available to run day to day: what it owns that will turn into cash within a year, minus what it owes within a year. Positive working capital means you can cover near-term bills; negative working capital means upcoming obligations exceed liquid resources.
Working Capital Formula and Ratio
Working capital = current assets − current liabilities
Working capital ratio (current ratio) = current assets ÷ current liabilities
Current assets include cash, accounts receivable, and inventory. Current liabilities include accounts payable, short-term debt, the current portion of long-term debt, and accrued expenses such as payroll and taxes.
Current assets: cash, receivables, inventory. Current liabilities: bills and debt due within a year.
Worked Example
| Line | Amount |
|---|---|
| Cash | $40,000 |
| Accounts receivable | $70,000 |
| Inventory | $70,000 |
| Current assets | $180,000 |
| Accounts payable | $60,000 |
| Short-term debt | $30,000 |
| Accrued payroll and taxes | $30,000 |
| Current liabilities | $120,000 |
| Working capital | $60,000 |
| Current ratio | 1.5 |
Hypothetical figures for illustration.
What Is a Good Working Capital Ratio?
A ratio above 1.0 means current assets cover current liabilities. Many analysts treat roughly 1.2 to 2.0 as comfortable, but what is healthy depends on your industry: a restaurant that collects cash daily can run leaner than a contractor waiting 60 days on invoices. A very high ratio can also mean cash or inventory is sitting idle.
Lenders look at working capital and the trend over time. A falling ratio, rising payables, or receivables that take longer to collect are early warning signs they notice in your financial statements and bank statements.
How to Improve Working Capital
- Collect faster: invoice promptly, offer early-payment terms, or use receivables financing for slow payers.
- Right-size inventory so cash isn't tied up in slow-moving stock.
- Negotiate supplier terms to better match when you get paid.
- Match funding to need: short-term gaps fit a line of credit or working capital loan; long-term investments shouldn't drain working capital.
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Frequently Asked Questions
What is the working capital formula?
Working capital equals current assets minus current liabilities. The working capital (current) ratio equals current assets divided by current liabilities.
What is a good working capital ratio?
Above 1.0 means current assets cover current liabilities. Roughly 1.2 to 2.0 is often considered comfortable, but healthy levels vary by industry and cash cycle.
What does negative working capital mean?
Current liabilities exceed current assets, so the business may struggle to pay near-term obligations without new cash, faster collections, or financing.
How do I calculate working capital needs?
Estimate the cash tied up between paying for inputs and collecting from customers: typically inventory plus receivables minus payables, scaled to your expected sales.
What is a working capital loan?
Short-term funding, often 3 to 24 months, used for operating needs such as payroll, inventory, and bills while you wait on revenue.