WORKING CAPITAL
In short, working capital is the money available to meet your current, short-term
obligations. To make sure your working capital works for you, you'll need to
calculate your current levels, project your future needs and consider ways to
make sure you always have enough cash.
• Working capital, also called net working capital, represents the difference between a
company’s current assets and current liabilities.
• Working capital is a measure of a company’s liquidity and short-term financial health.
• A company has negative working if its ratio of current assets to liabilities is less than one
(or if it has more current liabilities than current assets).
• Positive working capital indicates that a company can fund its current operations and
invest in future activities and growth.
• High working capital isn’t always a good thing. It might indicate that the business has too
much inventory, not investing its excess cash, or not capitalizing on low-expense debt
opportunities.
How to calculate working capital
Working capital formula:
Current assets / Current liabilities = Working capital ratio
• If you have current assets of $1 million and current liabilities of $500,000, your working capital
ratio is 2:1. That would generally be considered a healthy ratio, but in some industries or kinds
of businesses, a ratio as low as 1.2:1 may be adequate.
Your net working capital tells you how much money you have readily available to meet current
expenses.
• Net working capital formula:
Current assets – Current liabilities = Net working capital
For these calculations, consider only short-term assets such as the cash in your business account and
the accounts receivable — the money your customers owe you — and the inventory you expect to
convert to cash within 12 months.
Short-term liabilities include accounts payable — money you owe vendors and other creditors — as well
as other debts and accrued expenses for salary, taxes and other outlays.
In short, working capital is the money available to meet your current, short-term
obligations. To make sure your working capital works for you, you'll need to
calculate your current levels, project your future needs and consider ways to
make sure you always have enough cash.
• Working capital, also called net working capital, represents the difference between a
company’s current assets and current liabilities.
• Working capital is a measure of a company’s liquidity and short-term financial health.
• A company has negative working if its ratio of current assets to liabilities is less than one
(or if it has more current liabilities than current assets).
• Positive working capital indicates that a company can fund its current operations and
invest in future activities and growth.
• High working capital isn’t always a good thing. It might indicate that the business has too
much inventory, not investing its excess cash, or not capitalizing on low-expense debt
opportunities.
How to calculate working capital
Working capital formula:
Current assets / Current liabilities = Working capital ratio
• If you have current assets of $1 million and current liabilities of $500,000, your working capital
ratio is 2:1. That would generally be considered a healthy ratio, but in some industries or kinds
of businesses, a ratio as low as 1.2:1 may be adequate.
Your net working capital tells you how much money you have readily available to meet current
expenses.
• Net working capital formula:
Current assets – Current liabilities = Net working capital
For these calculations, consider only short-term assets such as the cash in your business account and
the accounts receivable — the money your customers owe you — and the inventory you expect to
convert to cash within 12 months.
Short-term liabilities include accounts payable — money you owe vendors and other creditors — as well
as other debts and accrued expenses for salary, taxes and other outlays.
