Working capital

Current assets minus current liabilities: the short-term cash cushion a business runs on.

DefinitionCurrent assets minus current liabilities: the short-term cash cushion a business runs on.

Working capital is the difference between what a business will turn into cash within a year and what it must pay within a year. Current assets include cash, receivables and inventory; current liabilities include payables, accrued expenses and short-term debt. Positive working capital means near-term obligations are covered.

How it is computed

Working capital = current assets − current liabilities. The current ratio is current assets / current liabilities.

Example

Current assets of $1,250,000 and current liabilities of $800,000 give working capital of $450,000 and a current ratio of about 1.56.

Where it goes wrong

Treating all current assets as cash. If $300,000 of the $1,250,000 is slow-moving inventory and another $100,000 is receivables unlikely to be collected, the real cushion is much thinner. A growing company can also show rising working capital while running short of cash, because the growth is tied up in receivables. The full guide is working capital.

Articles that use this term

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