What is the working capital formula?

Working capital = current assets − current liabilities. Current assets include cash, accounts receivable, and inventory; current liabilities include accounts payable, short-term debt, and other bills due within twelve months. For example, $180,000 in current assets minus $120,000 in current liabilities equals $60,000 of working capital.

What is a good working capital ratio?

The working capital ratio (current assets ÷ current liabilities) is generally considered healthy between about 1.2 and 2.0. Below 1.0 means liabilities exceed liquid assets — a liquidity risk. Above 2.0 can indicate you're holding too much idle cash or inventory that could be put to more productive use. The ideal range varies by industry.

How can a business improve its working capital?

Speed up receivables (invoice promptly, tighten terms, offer early-pay discounts), manage inventory so cash isn't tied up in stock, negotiate longer supplier terms, and control unnecessary short-term debt. When a timing gap is unavoidable, a line of credit or working capital loan bridges it without draining reserves.

What Is Working Capital? Formula, Meaning, and Why It Matters

Q: What is working capital?

Working capital is the money a business has available to cover its short-term obligations — the difference between what it owns that can quickly become cash (current assets) and what it owes within a year (current liabilities). It measures short-term financial health and liquidity: positive working capital means you can comfortably meet near-term bills, while negative working capital signals a possible cash crunch.

Working capital is current assets minus current liabilities — the cash cushion that keeps a business running. Learn the formula and how to improve it.

Working capital is the difference between a business's current assets and its current liabilities — the cash cushion that keeps day-to-day operations running. The formula is simple: working capital = current assets − current liabilities. Positive working capital means you can cover near-term bills comfortably; negative working capital warns of a potential cash crunch.

Even a profitable business can fail if it runs out of cash to pay this month's bills. Working capital is the number that tells you whether you have that cushion. Here's exactly how to calculate it, what counts as healthy, and how to improve it.

The short version

Working capital = current assets (cash, receivables, inventory) − current liabilities (payables, short-term debt due within a year). Positive is good; a ratio of roughly 1.2–2.0 is healthy. Too low risks a cash crunch; too high may mean idle cash. Improve it by collecting receivables faster, managing inventory, and bridging unavoidable gaps with a line of credit.

The working capital formula

The calculation is straightforward:

Working capital = current assets − current liabilities

Current assets — things you own that will become cash within a year: cash on hand, accounts receivable (money customers owe you), and inventory.
Current liabilities — what you owe within a year: accounts payable, short-term loans, the current portion of long-term debt, taxes, and accrued expenses.

Working capital worked example
Line item	Amount
Cash	$45,000
Accounts receivable	$85,000
Inventory	$50,000
Current assets (total)	$180,000
Accounts payable	$70,000
Short-term debt & accrued	$50,000
Current liabilities (total)	$120,000
Working capital	$60,000

In this example the business has $60,000 of working capital — a positive cushion to absorb slow months and timing gaps.

What is the working capital ratio?

Where the dollar figure shows the raw cushion, the working capital ratio (also called the current ratio) shows proportion:

Working capital ratio = current assets ÷ current liabilities

Using the numbers above: $180,000 ÷ $120,000 = 1.5.

What's a healthy ratio?

A ratio between roughly 1.2 and 2.0 is generally considered healthy. Below 1.0 means your short-term debts exceed your liquid assets — a liquidity warning. Well above 2.0 can mean cash or inventory is sitting idle instead of fueling growth. The "right" range depends heavily on your industry's cash-conversion cycle.

Why working capital matters

Working capital is a real-time read on short-term financial health. It determines whether you can:

Make payroll during a slow month or before a big contract pays
Buy inventory ahead of a busy season without draining cash
Pay suppliers while waiting on customer invoices (net-30, net-60)
Absorb a surprise — an equipment repair, a late-paying client, a tax bill

Businesses often show a profit on paper yet run short on cash because revenue and expenses arrive on different schedules. Working capital measures your ability to survive that timing mismatch.

How to improve working capital

Collect receivables faster

Invoice the day work is done, tighten payment terms, and consider early-payment discounts. Every day you shorten the collection cycle frees cash.

Right-size inventory

Excess stock is cash frozen on a shelf. Order to demand and lean on supplier lead times so you're not over-holding.

Negotiate supplier terms

Extending payables from net-30 to net-45 or net-60 keeps cash in the business longer without any borrowing cost.

Bridge unavoidable gaps with the right financing

When a timing gap can't be engineered away, a business line of credit or working capital loan covers it — you draw only what you need instead of draining reserves.

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The bottom line

Working capital — current assets minus current liabilities — is the clearest single measure of whether a business can meet its near-term obligations. Aim for a positive cushion and a ratio in the healthy 1.2–2.0 range, then protect it by collecting faster, managing inventory, and negotiating terms. When a timing gap is unavoidable, the right short-term financing bridges it so a profitable business never stalls for lack of cash.