Working Capital Calculator
Current Assets
Current Liabilities
Net Working Capital
$0.00
Working Capital Ratio
0.00
Understanding Working Capital Calculation
Working capital is a financial metric that represents the operational liquidity of a business. It measures the difference between a company's short-term assets and its short-term liabilities. Calculating working capital is essential for business owners to ensure they can meet their upcoming financial obligations and fund day-to-day operations.
The Working Capital Formula
The standard formula for calculating working capital is straightforward:
Working Capital = Current Assets – Current Liabilities
Key Components of the Calculation
To get an accurate result, you must correctly identify your short-term financial positions:
- Current Assets: Resources the company expects to convert to cash within one year. This includes cash in the bank, inventory on hand, and accounts receivable (money customers owe you).
- Current Liabilities: Obligations the company must pay within one year. This includes accounts payable (money you owe suppliers), accrued expenses (like wages or taxes), and the current portion of any debt.
What Your Result Means
- Positive Working Capital: This indicates that your company has enough funds to cover its short-term liabilities. It suggests financial health and the potential for growth.
- Negative Working Capital: This occurs when liabilities exceed assets. It may indicate a "liquidity crunch," where a company struggles to pay its bills or is overly reliant on external financing.
- The Working Capital Ratio (Current Ratio): A ratio of 1.2 to 2.0 is generally considered healthy. A ratio below 1.0 indicates potential liquidity issues, while a ratio above 2.0 might suggest that the company is not reinvesting its excess cash efficiently.
Example Calculation
Imagine a small retail business with the following figures:
- Cash: $10,000
- Inventory: $15,000
- Accounts Payable: $8,000
- Short-term Loans: $2,000
Total Assets = $25,000. Total Liabilities = $10,000.
Working Capital = $15,000 ($25,000 – $10,000).
Working Capital Ratio = 2.5 ($25,000 / $10,000).