What is Working Capital?
Working capital measures a company's short-term financial health — the cash and liquid resources available to cover day-to-day operations. It's one of the first numbers analysts check before judging whether a business can pay its bills.
Working capital is Current Assets minus Current Liabilities. Positive working capital means a company can cover its short-term obligations; negative working capital signals a liquidity problem.
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Step-by-step worked examples
A retailer has $450,000 in current assets and $300,000 in current liabilities. Find its working capital.
WC = 450,000 − 300,000 = $150,000 Positive working capital → healthy short-term liquidity.
A startup has $80,000 in current assets and $120,000 in current liabilities.
WC = 80,000 − 120,000 = −$40,000 Negative working capital → may struggle to pay short-term bills.
An inventory-heavy manufacturer has $600,000 in current assets (including $250,000 of inventory) and $500,000 in current liabilities.
WC = 600,000 − 500,000 = $100,000 Though positive, a quick ratio check could reveal heavy inventory dependence.
Flashcards
Quick quiz
Q1.Current assets $200,000, current liabilities $150,000. Working capital?
Q2.Working capital is calculated from which financial statement?
Q3.Is negative working capital always a sign a company is failing?
Q4.Which of these is NOT a current asset?
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Common mistakes
Confusing working capital with cash on hand. — Correct: Working capital includes receivables and inventory, not just cash.
Assuming negative working capital is always bad. — Correct: Some business models with fast inventory turnover operate efficiently with negative WC.
Using total assets/liabilities instead of current only. — Correct: Only assets and liabilities due or convertible within a year count.
Ignoring the working capital trend over time. — Correct: A single snapshot matters less than the trend across quarters.
FAQ
What is the formula for working capital?
Working Capital = Current Assets − Current Liabilities.
How do you calculate working capital examples?
Subtract total current liabilities from total current assets, both found on the balance sheet.
What is a good working capital ratio?
A current ratio (CA/CL) between 1.2 and 2.0 is generally considered healthy.
How to calculate a working capital change?
Compare working capital at two dates; the change reflects cash tied up in or freed from operations.