Working Capital: Formula, Calculation and Management
Working Capital is the difference between current assets and current liabilities. It measures a company's short-term financial health.
Working Capital Formula
Working Capital = Current Assets - Current Liabilities
Current Assets
- Cash and equivalents
- Accounts receivable
- Inventory
- Prepaid expenses
Current Liabilities
- Accounts payable
- Accrued expenses
- Short-term debt
- Deferred revenue
Positive vs Negative Working Capital
| Type | What it means |
|---|---|
| Positive | Can cover short-term obligations |
| Negative | May have liquidity issues |
Working Capital Ratio
Current Ratio = Current Assets / Current Liabilities
| Ratio | Interpretation |
|---|---|
| > 1.5 | Healthy |
| 1.0 - 1.5 | Acceptable |
| < 1.0 | Liquidity concern |
Working Capital Management
- Receivables: Speed up collections
- Inventory: Optimize levels
- Payables: Negotiate extended terms
