What Is Working Capital?
Formula, meaning, and a worked example of short-term financial health.
Home › Accounting Glossary › Working Capital
| Related ratio | Current ratio |
|---|---|
| Found on | Balance sheet |
| Topic | Financial accounting · Liquidity |
Working capital in plain English
Working capital is the cushion of short-term resources left after you set aside enough to cover short-term debts. Positive working capital means current assets exceed current liabilities.
Worked example
A business has cash 15,000, receivables 25,000 and inventory 20,000. Its current liabilities are 40,000.
Current assets = 15,000 + 25,000 + 20,000 = 60,000.
Working capital = 60,000 − 40,000 = 20,000.
You can check your own figures with the Working Capital Calculator.
- Assuming more is always better. Large idle cash or slow-moving inventory can signal inefficiency.
- Ignoring the quality of current assets. Receivables that will never be collected are not real cushion.
Frequently asked questions
What does negative working capital mean?
Current liabilities exceed current assets, which can signal difficulty paying short-term debts. Some businesses with fast cash cycles operate this way on purpose.
What is the difference between working capital and the current ratio?
Working capital is an amount (assets minus liabilities). The current ratio divides current assets by current liabilities and gives a ratio.
How can a business improve working capital?
Collect receivables faster, manage inventory levels, and negotiate suitable payment terms with suppliers.
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This page is for general learning. Accounting rules vary by country and standard.