Working Capital Calculator

Working Capital: The Lifeblood of Your Business

Working capital is the difference between your current assets and current liabilities. It represents the operating liquidity available to a business on a day-to-day basis. Positive working capital means you can pay your bills, fund operations, and invest in growth. Negative working capital means you may struggle to meet short-term obligations.

The Working Capital Formula

Working Capital = Current Assets - Current Liabilities

Current assets include cash, accounts receivable, inventory, and other assets expected to be converted to cash within 12 months. Current liabilities include accounts payable, short-term debt, accrued expenses, and other obligations due within 12 months.

Understanding the Current Ratio

The current ratio divides total current assets by total current liabilities. A ratio of 1.0 means assets exactly equal liabilities. Most financial analysts consider a current ratio between 1.5 and 2.0 as healthy. Above 2.0 may suggest excess idle capital that could be deployed more productively.

The Quick Ratio (Acid Test)

The quick ratio is a more conservative measure that excludes inventory from current assets. Inventory can be slow to convert to cash, especially during economic downturns. A quick ratio of 1.0 or higher means the business can meet its obligations without selling any inventory, providing a stronger test of liquidity.

Working Capital Management Tips

• Speed up collections: Offer early payment discounts, send invoices promptly, and follow up on overdue accounts to reduce days sales outstanding (DSO).
• Optimize inventory: Use just-in-time ordering, identify slow-moving stock, and negotiate consignment terms with suppliers.
• Negotiate payment terms: Extend payable terms with vendors where possible to keep cash in your business longer.
• Monitor regularly: Track working capital monthly and look for trends. A declining ratio over time signals growing liquidity risk.

Industry Benchmarks

Working capital requirements vary significantly by industry. Retail and manufacturing businesses typically need more working capital due to inventory. Service businesses and SaaS companies often operate with less working capital because they have minimal inventory and collect payments quickly. Working capital as a percentage of revenue between 10% and 25% is generally considered healthy for most industries.