By Tera Loans Editorial · Published July 4, 2026
How to Calculate Working Capital (Formula and Examples)
Learn how to calculate working capital with the formula, worked examples, and the working capital ratio — plus how lenders read it and how to improve it.
Working capital is current assets minus current liabilities — the cash and near-cash you have available to cover short-term obligations. A positive number means you can pay near-term bills; a negative number warns of a coming cash crunch. The working capital ratio (current assets ÷ current liabilities) puts that in context, and a range of roughly 1.5 to 2.0 is generally healthy.
Working capital is one of the fastest reads on whether a business can survive the next twelve months. It's a single subtraction, but it tells you — and every lender who looks at your books — whether day-to-day operations can fund themselves. Here's the formula, worked examples, and how to act on the number.
The short version
Working capital = current assets − current liabilities. Positive means you can cover short-term obligations; negative is a warning sign. Use the working capital ratio (current assets ÷ current liabilities) to judge the degree of health — roughly 1.5 to 2.0 is a common healthy target. If a gap is temporary, a working capital loan can bridge it; if it's chronic, fix the cash conversion cycle instead.
The working capital formula
The formula is simple:
Working Capital = Current Assets − Current Liabilities
Current assets are what you own that will turn into cash within a year:
- Cash and cash equivalents
- Accounts receivable (money customers owe you)
- Inventory
- Marketable securities and other short-term assets
Current liabilities are what you owe within a year:
- Accounts payable (money you owe suppliers)
- Short-term debt and lines of credit
- The current portion of long-term loans
- Accrued expenses and taxes due
Subtract the second from the first, and you have your net working capital — the cushion (or the shortfall) between what's coming in soon and what's going out soon.
A worked example
Say a small manufacturer's balance sheet shows the following:
| Item | Amount |
|---|---|
| Cash | $40,000 |
| Accounts receivable | $85,000 |
| Inventory | $120,000 |
| Total current assets | $245,000 |
| Accounts payable | $70,000 |
| Short-term debt | $50,000 |
| Total current liabilities | $120,000 |
| Working capital | $125,000 |
Working capital is $245,000 − $120,000 = $125,000. That positive cushion means the business can comfortably cover its near-term obligations and still fund normal operations.
The working capital ratio
The raw dollar figure doesn't say much on its own — $125,000 is a fortress for a corner cafe and a rounding error for a distributor. The working capital ratio (also called the current ratio) puts it in proportion:
Working Capital Ratio = Current Assets ÷ Current Liabilities
In the example above: $245,000 ÷ $120,000 = 2.04.
How to read the ratio
A ratio between roughly 1.5 and 2.0 is generally considered healthy. Below 1.0 means current liabilities exceed current assets — a liquidity risk. Well above 2.0 isn't automatically better: it can signal idle cash or excess inventory that could be working harder. Healthy ranges vary meaningfully by industry, so compare against peers, not a universal number.
Working capital vs cash flow
These get conflated, but they measure different things. Working capital is a snapshot on a given date. Cash flow is the movement of money over a period.
A business can show healthy working capital on paper and still miss payroll — because most of those "current assets" are locked in receivables customers haven't paid or inventory that hasn't sold. That's why the quality and timing of current assets matter as much as the total. The gap between paying your bills and collecting your revenue is the cash conversion cycle, and shortening it is the core of working capital management.
How to improve working capital
Collect receivables faster
Invoice immediately, set clear terms, and follow up on late payers. Every day you shave off collection frees cash. When invoices are the bottleneck, invoice factoring can convert them to cash now.
Manage inventory deliberately
Cash sitting in unsold stock is cash you can't use. Order to demand and clear slow movers rather than tying up capital on shelves.
Negotiate supplier terms
Extending payables from 30 to 45 or 60 days keeps cash in your account longer without any borrowing — a free improvement to working capital.
Bridge temporary gaps with the right financing
When a gap is genuinely a timing issue — a seasonal swing or a big order to fund — a working capital loan or business line of credit covers it without draining reserves.
If you're deciding how much short-term financing a gap actually needs, model the monthly cost first.
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A representative estimate at 9%–20% APR. Actual rates and terms vary by business and product.
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Calculate working capital regularly — not just when a lender asks. Tracked over time, it's an early-warning system: a ratio drifting toward 1.0 tells you to tighten collections or restructure short-term debt long before you're scrambling to make payroll. The formula takes thirty seconds; acting on the trend is what keeps a profitable business solvent.
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