What is working capital?

Working capital is the difference between a company's current assets and current liabilities. It measures the short-term financial health and operational efficiency of a business. Formula: Working Capital = Current Assets - Current Liabilities Positive working capital means you have enough short-term assets to cover short-term liabilities. Negative working capital means you may struggle to meet short-term obligations. Example: - Current Assets: 150,000 (cash, receivables, inventory) - Current Liabilities: 80,000 (payables, short-term debt) - Working Capital: 150,000 - 80,000 = 70,000 (positive) Working capital is essential for: - Day-to-day operations - Paying suppliers and employees - Managing inventory - Handling unexpected expenses

What is a good current ratio?

The current ratio measures your ability to pay short-term obligations with short-term assets. Current Ratio Interpretation: - Below 1.0: Poor - liabilities exceed assets, liquidity problems likely - 1.0 to 1.5: Acceptable - can meet obligations but limited cushion - 1.5 to 2.5: Good - healthy liquidity position - Above 2.5: Very strong - excellent liquidity, but may indicate: * Excess cash sitting idle * Slow-moving inventory * Poor use of capital Ideal ratio varies by industry: - Retail: 1.5 to 2.0 (due to inventory) - Service companies: 1.2 to 1.5 (low inventory) - Manufacturing: 1.5 to 2.5 (higher inventory/receivables) - Technology/SaaS: 2.0+ (high cash, low liabilities) Example: Current Assets 200,000 ÷ Current Liabilities 100,000 = 2.0 ratio (healthy)

What are current assets and current liabilities?

Current Assets are resources that will be converted to cash or used up within one year: 1. Cash and Cash Equivalents: Bank accounts, money market funds 2. Accounts Receivable: Money owed by customers (typically 30-90 days) 3. Inventory: Raw materials, work-in-progress, finished goods 4. Marketable Securities: Short-term investments easily sold 5. Prepaid Expenses: Prepaid rent, insurance, supplies Current Liabilities are obligations due within one year: 1. Accounts Payable: Money owed to suppliers 2. Short-term Debt: Loans due within 12 months 3. Current Portion of Long-term Debt: Next year's loan payments 4. Accrued Expenses: Wages, utilities, rent owed but not yet paid 5. Taxes Payable: Income tax, sales tax due 6. Unearned Revenue: Customer deposits, advance payments Do NOT include: - Fixed assets (buildings, equipment) - these are long-term - Long-term debt (beyond 1 year) - only current portion counts - Owner's equity - this is not a liability

How can I improve my working capital?

To improve working capital and current ratio: Increase Current Assets: 1. Speed up collections: - Offer early payment discounts - Follow up on overdue invoices promptly - Require deposits for large orders - Use electronic payments for faster processing 2. Reduce inventory: - Implement just-in-time inventory - Clear out slow-moving stock - Negotiate shorter supplier lead times - Improve demand forecasting 3. Increase cash: - Inject owner capital - Obtain long-term financing - Sell unused fixed assets Decrease Current Liabilities: 1. Negotiate better payment terms: - Extend payable periods (30 to 60 days) - Negotiate payment plans for large debts - Consolidate short-term debt into long-term 2. Reduce expenses: - Cut unnecessary spending - Renegotiate supplier contracts - Reduce overhead costs 3. Convert short-term to long-term debt: - Refinance short-term loans to longer terms - This moves liability from current to long-term Example Impact: Before: Assets 100,000 / Liabilities 90,000 = 1.11 ratio After: Assets 120,000 / Liabilities 80,000 = 1.50 ratio (improved!)

Is negative working capital always bad?

Negative working capital is generally concerning, but not always bad depending on your business model: When it's a problem: - Traditional businesses (retail, manufacturing, services) - Indicates cash flow problems - May struggle to pay suppliers/employees - Could lead to bankruptcy if sustained - Difficulty obtaining financing When it might be acceptable: 1. High cash velocity businesses: - Amazon, Walmart, McDonald's operate with negative working capital - Collect cash from customers immediately - Pay suppliers 30-60 days later - Inventory turns over very quickly 2. Subscription/SaaS businesses: - Collect annual subscriptions upfront (cash) - Record as deferred revenue (liability) - Negative working capital, but strong cash position 3. Seasonal businesses: - May have negative working capital off-season - Positive during peak season - Normal if managed properly Key question: Can you pay bills when due? - If yes (due to strong cash flow), negative working capital may be fine - If no, negative working capital is a serious problem Example: Negative WC but healthy: Assets 80,000 / Liabilities 100,000, but collecting cash daily and paying suppliers in 60 days Negative WC and unhealthy: Assets 80,000 / Liabilities 100,000, slow collections, immediate supplier payments

Working Capital Calculator - Calculate Current Ratio & Liquidity

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How to Use Working Capital Calculator

How to Use the Working Capital Calculator:

Enter Current Assets - total value of assets that can be converted to cash within one year:
- Cash and cash equivalents
- Accounts receivable
- Inventory
- Marketable securities
- Prepaid expenses
Enter Current Liabilities - total obligations due within one year:
- Accounts payable
- Short-term debt
- Current portion of long-term debt
- Accrued expenses
- Taxes payable
Results are calculated automatically as you type
View the breakdown:
- Working Capital: Current Assets minus Current Liabilities
- Current Ratio: Current Assets divided by Current Liabilities
- Liquidity Status: Interpretation of your financial position

The calculator uses these formulas:

Working Capital = Current Assets - Current Liabilities
Current Ratio = Current Assets ÷ Current Liabilities

Understanding the Results:

Positive Working Capital: Good - you have more current assets than liabilities
Negative Working Capital: Concerning - liabilities exceed assets
Current Ratio of 1.5-2.5: Generally considered healthy
Current Ratio below 1: Liquidity issues, may struggle to pay bills
Current Ratio above 2.5: Strong liquidity, but may indicate underutilized resources

Try the example scenarios for Healthy Position, Tight Liquidity, or Strong Position to see different scenarios.

Frequently Asked Questions

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