Working Capital Calculator
Assess your business liquidity by calculating Net Working Capital and Current Ratio.
Current Assets
Current Liabilities
Total Current Assets:
$0.00
Total Current Liabilities:
$0.00
Net Working Capital:
$0.00
Current Ratio:
0.00
How to Calculate Working Capital
Working capital is a vital financial metric that represents the operational liquidity available to a business. It measures a company's ability to pay off its short-term liabilities with its current assets. Understanding your working capital helps you manage day-to-day operations and plan for future growth.
The Working Capital Formula
The standard formula for calculating working capital is straightforward:
Working Capital = Current Assets – Current Liabilities
Key Components of Working Capital
- Current Assets: These are assets expected to be converted into cash within one year. Examples include cash in bank accounts, accounts receivable (money owed by customers), inventory, and prepaid expenses.
- Current Liabilities: These are obligations the company must pay within one year. Examples include accounts payable (money owed to suppliers), short-term loans, accrued wages, and taxes.
Example Calculation
Imagine a small retail store with the following balance sheet items:
- Cash: $20,000
- Accounts Receivable: $10,000
- Inventory: $30,000
- Accounts Payable: $15,000
- Short-term Debt: $5,000
Total Current Assets: $20,000 + $10,000 + $30,000 = $60,000
Total Current Liabilities: $15,000 + $5,000 = $20,000
Net Working Capital: $60,000 – $20,000 = $40,000
In this scenario, the business has $40,000 in working capital, indicating a healthy liquidity position to cover immediate costs.
Why the Working Capital Ratio Matters
While the dollar amount of working capital is important, the Working Capital Ratio (or Current Ratio) provides context relative to the size of the business. It is calculated as Current Assets / Current Liabilities.
- Ratio > 1.0: The company can meet its short-term obligations.
- Ratio < 1.0: The company may struggle to pay debts, indicating potential liquidity issues.
- Ratio between 1.2 and 2.0: Generally considered a healthy sign of efficiency and financial stability.