Working capital is the difference between a business’s current assets and current liabilities. It shows whether the business has enough short-term resources to fund inventory, payroll, supplier invoices and other operating needs.
How is working capital calculated?
The standard formula is:
Working capital = current assets − current liabilities
Current assets commonly include cash, accounts receivable and inventory expected to be converted into cash within 12 months. Current liabilities commonly include accounts payable, short-term debt and accrued expenses due within the same period.
Illustrative working capital calculation
| Calculation step | Amount | What it means |
|---|---|---|
| Cash | $80,000 | Immediately available funds |
| Accounts receivable | $140,000 | Customer invoices expected to be collected |
| Inventory | $100,000 | Stock expected to be sold or used |
| Total current assets | $320,000 | $80,000 + $140,000 + $100,000 |
| Current liabilities | ($215,000) | Amounts due within 12 months |
| Working capital | $105,000 | $320,000 − $215,000 |
In this example, the business has positive working capital of $105,000. The result does not show how quickly receivables will be collected or inventory will sell, so it should be reviewed with cash-flow timing.
Why does working capital matter?
A profitable business can still face a cash shortage when customers pay slowly, inventory remains unsold or suppliers require payment before sales proceeds arrive. Working capital analysis helps finance teams identify that timing gap.
Working capital versus cash flow
Working capital is a balance-sheet measure at a point in time. Cash flow records money entering and leaving during a period. A business may report positive working capital while still experiencing a temporary cash shortfall.
How can a business improve working capital?
Common measures include collecting receivables sooner, reducing excess inventory, negotiating suitable supplier terms and matching financing maturities to the operating cycle. Extending payment terms without regard to supplier stability can create supply risk.
What should be reviewed?
Track the calculation date, aging of receivables and payables, inventory quality, restricted cash, seasonal requirements and liabilities not captured in headline figures. Compare results over time rather than relying on one period.
