Ideal Business Consultants

How to Calculate Working Capital:

Working capital measures how much in liquid assets a company has available to build its business.

The working capital ratio is calculated as:  Working Capital = Current Assets Current Liabilities

The number can be positive or negative, depending on how much debt the company is carrying.  If a companys current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the companys sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller.

Working capital also gives investors an idea of the companys underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the companys obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the companys operations.

Working Capital is the life blood of most small businesses. Access to working capital provides the ability to support and grow a healthy cash flow for a business. If you have the opportunity to build your business by investing in additional equipment, supplies, or more advanced technology, it may be in your best interest to take it. A short-term loan will allow you to act quickly. Working capital loans may also be used to pay for things like advertising costs, salaries, rent and monthly bills while you wait for the funds to come in.

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