When to use this calculator
Working capital shows whether the short-term assets of your business are larger than the bills due over the next year. Use the calculator at each month end or year end to follow the trend, before taking on a large order that ties up cash in materials, or when you prepare figures for a lender or investor.
You need two totals from the same balance sheet. Current assets are cash plus what will turn into cash or be used up within a year, mainly money customers owe you and inventory. Current liabilities are what you must pay within a year, such as supplier bills, short-term loans, taxes owed and the part of any long-term loan that falls due within twelve months. The balance sheet report in your accounting software usually shows both totals.
Reading the result
The result is an amount in your currency. A positive figure means current assets are larger than current liabilities. A negative figure means the bills due within the year are larger than the assets you expect to turn into cash in that time, so part of them would have to be paid from future sales, new borrowing or other sources.
The calculator also shows the current ratio alongside the amount. It uses the same two totals but divides instead of subtracting, which puts the amount in proportion. Working capital of 50,000 gives a current ratio of 2.00 if current liabilities are 50,000, but 1.10 if they are 500,000. The amount tends to grow with the size of the business, while the ratio lets you compare businesses of different sizes.
- Negative working capital can signal pressure on cash. It is not always a warning sign: a business whose customers pay up front while its suppliers give it credit can run with negative working capital for long periods.
- Large positive working capital gives more cover, but it can also mean cash is tied up in unsold inventory or in invoices customers have not paid. Positive working capital is not the same as cash in the bank.
What is normal varies by industry and business model. Compare your figure with earlier periods, at the same point in the year if your business is seasonal.
What changes working capital
- Paying a supplier from cash lowers current assets and current liabilities by the same amount, so working capital does not change. The current ratio does: current assets of 100,000 against current liabilities of 50,000 give 2.00, and after paying 10,000 of bills they give 2.25.
- A short-term loan adds the same amount to cash and to current liabilities, so working capital stays the same. A long-term loan adds cash while only the part repayable within twelve months counts as a current liability, so working capital rises.
- Buying equipment with cash reduces working capital, because the cash leaves current assets and the equipment is a long-term asset.
- Profitable sales usually increase it, because cash or receivables grow by more than the cost of the inventory sold.
Common planning mistakes
- Counting slow-moving or outdated inventory, or invoices that are unlikely to be paid, at full value.
- Leaving out the part of a long-term loan due within the next twelve months, or tax and payroll amounts that are owed but not yet paid.
- Treating a positive figure as spare cash. You can still run short in a month when bills fall due before customers pay.
- Taking current assets and current liabilities from different dates.
Related tools
The quick ratio repeats the test without inventory, which is useful if your inventory is slow to sell. The cash conversion cycle estimates how long cash is tied up between paying suppliers and collecting from customers. To see how quickly your customers pay, use days sales outstanding.