Working capital: formula, worked example and the working capital cycle

Working capital is current assets minus current liabilities: what a business would have left if it paid every bill due within the year from the assets that turn into cash within the year. A company with current assets of $2,450,000 and current liabilities of $1,200,000 has working capital of $1,250,000 and a current ratio of 2.04. The part operations actually control, receivables plus inventory minus payables, is trade working capital, and in days it runs DSO + DIO − DPO.

The formula

Working capital = Current assets − Current liabilities

Current ratio = Current assets / Current liabilities

The SEC's beginners' guide to financial statements puts it plainly: current assets are "things a company expects to convert to cash within one year", current liabilities are "obligations a company expects to pay off within the year", and working capital is "the money leftover if a company paid its current liabilities from its current assets."

US GAAP is slightly more precise. ASC 210-10-45 classifies an item as current if it will be realized or settled within twelve months or within the normal operating cycle, whichever is longer. A whiskey distiller or a homebuilder, whose operating cycle runs past a year, keeps its inventory in current assets even though it will not sell within twelve months.

Current assets are usually cash, accounts receivable, inventory and prepaid expenses. Current liabilities are accounts payable, accrued liabilities, short-term borrowings such as a line of credit, and the current portion of long-term debt.

A worked balance sheet

One company at March 31, 2026, the end of a 90-day quarter (January 1 to March 31). It is the same company and quarter as the days sales outstanding and days payable outstanding examples: credit sales of $2,400,000 and cost of goods sold of $1,560,000.

Working capital is 2,450,000 − 1,200,000 = $1,250,000. In Excel, with current assets in B2:B5 and current liabilities in D2:D4:

Working capital:  =SUM(B2:B5)-SUM(D2:D4)
Current ratio:    =SUM(B2:B5)/SUM(D2:D4)
Quick ratio:      =(B2+B3)/SUM(D2:D4)

The current ratio is 2,450,000 / 1,200,000 = 2.04. The quick ratio leaves out inventory and prepaid expenses, which cannot pay a bill next week:

Quick ratio = (Cash + Receivables + Short-term investments) / Current liabilities

Here that is (380,000 + 1,225,000) / 1,200,000 = 1,605,000 / 1,200,000 = 1.34. Both are among the liquidity ratios in the CFA Institute's reading on financial analysis techniques, which also notes that the cash conversion cycle is a liquidity measure that is not a simple ratio.

For a real balance sheet, Sysco's fiscal 2026 Form 10-K reports total current assets of $13,437 million and total current liabilities of $10,523 million at June 27, 2026: working capital of $2,914 million and a current ratio of 1.28.

Trade working capital

Working capital in total mixes three different things: operations (receivables, inventory, payables), financing (the line of credit) and the cash pile. Trade working capital keeps only the operational part:

Trade working capital = Trade receivables + Inventory − Trade payables

1,225,000 + 780,000 − 624,000 = $1,381,000. It is the measure sales, operations and procurement can move: collect faster, hold less stock, pay on terms rather than early. As a share of revenue it compares across periods and companies: quarterly revenue of $2,400,000 annualizes to $9,600,000, and 1,381,000 / 9,600,000 = 14.4%. Every extra dollar of annual sales ties up about 14 cents in trade working capital.

A wider operating version, current assets excluding cash minus current liabilities excluding short-term debt, is (2,450,000 − 380,000) − (1,200,000 − 350,000) = $1,220,000. Whichever you use, name it in the report.

The working capital cycle

Trade working capital in days is the working capital cycle:

Working capital cycle (days) = DSO + DIO − DPO

Cash leaves for suppliers 36 days after the goods arrive, but comes back from customers about 91 days after they arrive (45 days on the shelf, then 45.9 days in receivables). The business funds the 54.9-day gap itself. The full treatment, including how to read each leg, belongs to the cash conversion cycle; this page keeps to the one table.

The check

Three ties prove the figures before anyone reads them.

1. The lines sum to the totals. 380,000 + 1,225,000 + 780,000 + 65,000 = 2,450,000, and 624,000 + 226,000 + 350,000 = 1,200,000. Both totals must equal the balance sheet in the general ledger at March 31.
2. Trade working capital rebuilds from the subledgers. Receivables of $1,225,000 equal the AR aging report total, payables of $624,000 the AP aging total, and inventory of $780,000 the stock valuation report.
3. The days reconcile back to the balances. Days × daily P&L figure must return each balance: 45.9375 × 26,666.67 = 1,225,000; 45 × 17,333.33 = 780,000; 36 × 17,333.33 = 624,000, where 26,666.67 is daily sales (2,400,000 / 90) and 17,333.33 daily cost of goods sold (1,560,000 / 90). Round the days only for display.

If the AR aging and the ledger disagree, DSO and working capital are both wrong, and no ratio will show it.

Positive, negative and change in working capital

Positive working capital means current assets cover the bills due within the year. Higher is not automatically better: the 2.04 here includes $780,000 of inventory, and a current ratio fattened by slow stock or overdue receivables is cash stuck, not strength. A current ratio between roughly 1.2 and 2 is a common rule of thumb, nothing more.

Negative working capital means current liabilities exceed current assets. A grocery chain that sells for cash within days but pays suppliers on 30-day terms can run that way safely for years; customers fund the inventory. For a B2B distributor on 30-day terms, negative working capital usually means short-term debt is funding long-term assets or losses.

Change in working capital is how the balance sheet reaches the cash-flow statement. Under the indirect method of ASC 230, net income is adjusted for changes in operating assets and liabilities: a rise in receivables or inventory uses cash, and a rise in payables provides it. If trade working capital had been $1,301,000 at December 31, 2025, the $80,000 increase to $1,381,000 would show as an $80,000 use of cash in operating activities, even with every sale profitable.

How to release cash

Each leg converts to cash at its daily rate:

Cash released = Days reduced × Daily sales (DSO) or Daily cost of goods sold (DIO, DPO)

DSO is the biggest lever per day, because it runs at the sales rate rather than at cost. Start with the customers paying furthest beyond terms. For inventory, inventory aging by site shows which stock is tying up the cash. For payables, payment terms compliance shows which suppliers you pay early; paying them on terms releases cash without paying anyone late. Professional-services firms run the same arithmetic on unbilled work and receivables as lock-up.

Where it goes wrong

• A high current ratio read as strength. If it is slow-moving inventory or overdue receivables, it is cash that will not arrive.
• Cash and short-term debt in "operating" working capital. Drawing on the line of credit to pay suppliers changes nothing in operations, but it moves payables into debt; keep financing out of the operating measure.
• Year-end window dressing. Payments held back or collections pushed before the balance-sheet date flatter one day. Track month-end averages, not one date.
• Dollars compared across companies. $1,250,000 means nothing next to a company ten times larger; compare days or percent of revenue.
• Growth that consumes cash. At 14.4% of revenue, 25% sales growth adds 0.25 × 1,381,000 = $345,250 of trade working capital. A profitable, fast-growing company can run out of cash.

Where working capital is tied up

One balance sheet says how much working capital there is, not who holds it. Covirage computes DSO, DIO and DPO per customer, product and supplier from your uploaded ledgers and inventory file, reconciles them to the balance sheet, and shows where the days sit; the deterministic tools do every calculation, and the external AI model explains the result and never does the arithmetic. See Covirage for finance teams, and days sales outstanding for the customer leg worked customer by customer. For how fast stock turns, see inventory turnover ratio, and to project the cash those days release, see cash flow forecast.