Working capital

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

• Common shares
• Preferred shares

Find out more in our glossary