Calculating working capital is simpler than most business owners expect — it comes down to one subtraction. But knowing how to calculate it, what to include, and what the result actually tells you is what turns a number into a useful decision-making tool. This guide walks through the formula step by step, with real examples.
For the bigger picture on what working capital is and why it matters, see our complete guide to working capital.
The Working Capital Formula
The formula is short:
Working Capital = Current Assets - Current Liabilities
That's it. Everything else is understanding what goes into each side.
Step 1: Add Up Your Current Assets
Current assets are everything your business owns that can be converted to cash within one year. For most small businesses, that means:
- Cash and cash equivalents — money in your business bank accounts
- Accounts receivable — money customers owe you but haven't paid yet
- Inventory — products or materials you expect to sell within the year
- Short-term investments — anything easily liquidated within a year
- Prepaid expenses — things you've paid for in advance, like insurance
Add these together to get your total current assets.
Step 2: Add Up Your Current Liabilities
Current liabilities are everything your business owes within one year. Typically:
- Accounts payable — bills and invoices you owe to suppliers
- Short-term debt — loans or credit due within a year
- Accrued expenses — wages, taxes, and other costs you've incurred but not yet paid
- Current portion of long-term debt — the part of a longer loan due this year
Add these together to get your total current liabilities.
Step 3: Subtract
Subtract your total current liabilities from your total current assets. The result is your working capital.
A Real Example
Let's say you run a small retail business. Here's your snapshot:
Current assets:
- Cash: $30,000
- Accounts receivable: $25,000
- Inventory: $65,000
- Total: $120,000
Current liabilities:
- Accounts payable: $45,000
- Short-term debt: $20,000
- Accrued wages and taxes: $15,000
- Total: $80,000
Working capital = $120,000 - $80,000 = $40,000
That $40,000 is your operating cushion — the money available to run day-to-day operations after covering short-term obligations.
What Your Working Capital Number Means
The raw number matters, but so does the ratio. The working capital ratio (also called the current ratio) is calculated as:
Working Capital Ratio = Current Assets / Current Liabilities
Using the example above: $120,000 / $80,000 = 1.5
As a general guideline:
- Below 1.0 — current liabilities exceed current assets; a possible cash crunch
- 1.2 to 2.0 — a commonly cited healthy range for many businesses
- Above 2.0 — comfortable, but may signal cash or inventory sitting idle that could fund growth
These are general benchmarks, not rules — the right level varies by industry and business model.
Why the Calculation Can Mislead You
A single working capital calculation is a snapshot in time. It can look healthy on paper while your business still feels a cash squeeze — for example, if a large chunk of your current assets is tied up in inventory that's slow to sell, or in receivables that customers are slow to pay. That's why many owners track working capital over time and pay attention to how quickly assets actually convert to cash, not just the total.
Frequently Asked Questions
What is the formula for working capital?
The formula is Current Assets minus Current Liabilities. Current assets include cash, accounts receivable, and inventory; current liabilities include accounts payable, short-term debt, and accrued expenses.
How do you find working capital on a balance sheet?
On a balance sheet, add up the items listed under current assets, add up the items listed under current liabilities, and subtract the second total from the first. Both sections are typically grouped and labeled on a standard balance sheet.
What is the working capital ratio?
The working capital ratio, also called the current ratio, is current assets divided by current liabilities. A ratio between 1.2 and 2.0 is often considered healthy, though the ideal varies by industry.
Is working capital the same as cash flow?
No. Working capital is a snapshot of assets minus liabilities at a point in time, while cash flow tracks the movement of money in and out of the business over a period. A business can have positive working capital but still face cash-flow timing problems.
What is a good working capital amount?
Rather than a fixed dollar amount, working capital is usually judged by the ratio of current assets to current liabilities, with 1.2 to 2.0 often cited as healthy. The right amount depends on your industry, business model, and how quickly your assets convert to cash.
When the Numbers Show You Need More
If your working capital calculation reveals a gap — or if growth is tying up your cash faster than it comes in — it may be worth exploring outside funding to bridge it. Options range from lines of credit to revenue-based funding, each suited to different situations.
See your working capital options →
Related reading: What Is Working Capital? · Alternative Business Funding Guide · Explore Funding Options
Berkman Financial is a financing broker that works across a network of funders. This guide is educational and not financial advice. We do not guarantee approval, rates, or specific funding outcomes.
