How to use the working capital calculator
- Enter your current assets: cash, accounts receivable, inventory and anything else you expect to turn into cash within a year.
- Enter your current liabilities: accounts payable, short-term debt due within a year and other bills due in the next 12 months.
- Read the working capital, then the current, quick and cash ratios. The tables show each side so you can check the totals.
Formula
Working capital = current assets - current liabilities
Current ratio = current assets / current liabilities
Quick ratio = (cash + receivables) / current liabilities
Cash ratio = cash / current liabilities
The quick ratio here leaves out inventory and other current assets. Some references define it as current assets minus inventory, so check which definition a lender or textbook uses.
A small business balance sheet
Cash is $30,000, receivables $45,000, inventory $25,000 and other current assets $5,000, so current assets are $105,000. Payables are $28,000, short-term debt $15,000 and other current liabilities $12,000, so current liabilities are $55,000.
Working capital is $105,000 - $55,000 = $50,000. The current ratio is 105,000 / 55,000 = 1.91. The quick ratio is (30,000 + 45,000) / 55,000 = 1.36. The cash ratio is 30,000 / 55,000 = 0.55.
What working capital tells you
Working capital is the short-term cushion. If it is positive, the things you expect to turn into cash within a year outweigh the bills due in the same period. If it is negative, you need cash from somewhere else, such as new sales, a credit line or slower payments to suppliers, to meet those bills.
The ratios scale the same idea so that businesses of different sizes can be compared with themselves over time. A rising current ratio that comes from growing inventory is not the same as one that comes from more cash, which is why the quick and cash ratios are shown next to it.
Reading the numbers with care
There is no single good value. A retailer that sells for cash and pays suppliers on terms may run with a low ratio, while a firm with slow-paying customers may need a high one. Compare your own figures month to month and against what your lender asks for, not against a rule that ignores your industry.
Receivables are only worth what you collect, and inventory only what it sells for. If either is at risk, enter a lower number. For a forward view of the same business, use the cash flow forecast calculator, and to see how fast stock sells use the inventory turnover calculator.
Assumptions and limits
- You enter the balances yourself. The tool does not read accounting files.
- Short-term means due or expected within 12 months.
- The quick ratio uses cash plus receivables only. Marketable securities are not a separate line, so add them to cash if you hold them.
- Ratios are not defined when current liabilities are zero, and the tool says so instead of showing a number.
Frequently asked questions
What is a good working capital ratio?
There is no universal answer, because it depends on the industry and on how quickly you collect and pay. Track your own ratio over time, and ask your lender or accountant which level they expect for your kind of business.
Can working capital be negative?
Yes. It means current liabilities are larger than current assets. Some businesses that collect cash before they pay suppliers run this way on purpose, while for others it is a warning that bills may be hard to meet.
What is the difference between the current ratio and the quick ratio?
The current ratio counts all current assets, including inventory. The quick ratio counts only cash and receivables, which are closer to cash, so it is a stricter test of whether you can pay bills soon.
Does working capital include long-term debt?
Only the part of long-term debt due within the next 12 months belongs in current liabilities. The rest is left out of working capital.