Financial support and resources available for businesses impacted by COVID-19.

Support for businesses impacted by COVID-19.

Working capital

Share

Working capital is the amount of cash and other assets a business has available after all its current liabilities are accounted for. It is one of six main calculations used to determine short-term liquidity—the ability of a company to pay its bills as they come due.

As a dollar figure, working capital is calculated as follows:

Working capital = current assets—current liabilities

Companies can also calculate their working capital ratio, which shows how much working capital is available for every dollar of current liabilities:

Working capital ratio = (current assets / current liabilities)

Most companies aim for a working capital ratio of between $1.50 and $1.75 for each $1 of current liabilities, although what constitutes a “healthy” ratio varies by industry.

More about working capital

Using figures from the balance sheet excerpt below, ABC Co.’s working capital and working capital ratio would be:

Working capital = $120,000$70,000 = $50,000

Working capital ratio = $120,000 / $70.000 = 1.7 (rounded)

With $1.70 for every $1 of current liabilities, ABC Co. has a healthy working capital ratio for its industry.

Related definitions

Find out more in our glossary

Useful resources

Money and finance

How to use the working capital ratio to keep your business healthy

Read article
Money and finance

How to increase working capital and keep your business agile: 6 tips

Read article

Free eBook: Master your cash flow

Get your step-by-step guide to purchasing a place of business so you can understand whether it’s the right move for your company, who can steer you through the process to avoid common pitfalls, and what you can do to budget, negotiate and finance your purchase effectively.

Share