Working Capital Calculator

About the Working Capital Calculator

Working capital is the money a business has available to run its day-to-day operations: to pay suppliers, staff and other short-term bills while it waits for customers to pay. It is one of the first things a bank, investor or buyer looks at, because it shows whether a business can meet its obligations over the coming year without having to borrow or sell long-term assets.

This working capital calculator works out working capital from current assets and current liabilities, and the two most widely used liquidity ratios: the current ratio and the quick ratio, which leaves out stock. It also explains what the ratios suggest, so you can judge whether the business has a comfortable cushion or is running close to the edge.

How to Use the Working Capital Calculator

Enter current assets: cash, money owed by customers (receivables), inventory, prepaid expenses and anything else expected to turn into cash within a year.

Enter current liabilities: money owed to suppliers (payables), short-term loans and overdrafts, the part of long-term loans due within a year, tax owed and accrued expenses.

Optionally, enter the inventory included in current assets, to calculate the quick ratio.

You will find these figures on the balance sheet.

How Working Capital Is Calculated

  working capital  =  current assets − current liabilities
  current ratio    =  current assets ÷ current liabilities
  quick ratio      =  (current assets − inventory) ÷ current liabilities

Step-by-Step Example

Current assets of 150,000, including 60,000 of inventory, and current liabilities of 90,000.

  Working capital:  150,000 − 90,000             =  60,000
  Current ratio:    150,000 ÷ 90,000             =  1.67
  Quick ratio:      (150,000 − 60,000) ÷ 90,000  =  1.00

The business has 1.67 of short-term assets for every 1 it owes in the coming year, and even without selling any stock it could cover its short-term debts exactly.

Reading the Ratios

A quick ratio of about 1 or more means the business could pay its current debts from cash and receivables alone. It matters most where stock is slow to sell or could lose value quickly.

These are rough guides, not rules. What counts as healthy depends a great deal on the industry.

Why Industries Differ

A supermarket sells its stock within days and takes cash at the till, while it may pay suppliers weeks later. It can run safely with a current ratio below 1, because cash keeps flowing in faster than it flows out. A manufacturer that holds months of raw materials and waits two months for customers to pay needs a much larger cushion.

So compare your ratios with similar businesses, and with your own figures over time. A steady decline in working capital is often more telling than any single year's number.

Improving Working Capital

Collect faster. Shorter payment terms, prompt invoicing and firm credit control turn receivables into cash sooner.

Manage stock. Clearing slow-moving lines and ordering to demand frees cash tied up in inventory.

Use supplier credit. Taking the full agreed credit period keeps cash in the business longer.

Refinance short-term debt. Replacing an overdraft with a longer-term loan moves the debt out of current liabilities and eases the pressure.

Retain profits. Keeping some profit in the business rather than paying it all out builds working capital over time.

The Working Capital Cycle

Working capital is not a fixed pot of money; it moves in a cycle. Cash is spent on stock or on the costs of delivering a service. The stock is sold, usually on credit, becoming money owed by customers. When customers pay, the cash returns and the cycle starts again. Meanwhile, suppliers may be giving the business time to pay for what it bought.

The length of that cycle — from paying suppliers to being paid by customers — decides how much working capital a business needs. A business that is paid quickly and pays suppliers later needs little. One that holds stock for months and waits a long time to be paid needs a lot, and needs more as it grows.

Working Capital and Growth

Growth consumes working capital. Doubling sales usually means roughly doubling stock and the money owed by customers, both of which have to be funded before the extra sales turn into cash. That is why fast-growing, profitable businesses sometimes run short of cash, and why planning working capital is part of planning growth.

Understanding Your Result

Working capital is current assets less current liabilities.

Current ratio compares short-term assets with short-term debts, with a brief interpretation.

Quick ratio does the same without inventory.

Worth knowing notes that a very high ratio can mean resources sitting idle.

When Should You Use This Calculator?

Reviewing a balance sheet at the end of a period.

Applying for a loan, where lenders check liquidity.

Assessing a customer or supplier's financial strength.

Evaluating a business you might buy or invest in.

Tracking liquidity from year to year.

Common Mistakes

Including long-term assets such as equipment in current assets.

Leaving out the current part of long-term loans.

Treating all stock as easy to sell.

Comparing with the wrong industry.

Looking at one year alone instead of the trend.