Working Capital Calculator

What this calculator tells you

Working capital is the money a business has available to meet its short-term obligations. It is the difference between current assets, which can be turned into cash within a year, and current liabilities, which fall due within the same period. This calculator shows working capital and the current ratio, which expresses the same position as a multiple.

A business that runs short of working capital can struggle to pay suppliers, wages and tax on time, even if it is profitable on paper. Monitoring the position helps to spot pressure early.

How the measures are worked out

Working capital equals current assets minus current liabilities. The current ratio equals current assets divided by current liabilities. A ratio above one means current assets exceed current liabilities, and a ratio below one means the business owes more in the short term than it holds in short-term assets. Working capital is a sum of money, while the current ratio shows the cover as a multiple.

A worked example

Suppose a business has current assets of 150,000, made up of cash, debtors and stock, and current liabilities of 100,000, made up of supplier bills, tax and short-term loans. Working capital is 150,000 minus 100,000, which is 50,000. The current ratio is 150,000 divided by 100,000, which is 1.5. This means the business holds 1.50 of short-term assets for every 1.00 of short-term bills.

Reading the figures

A higher ratio suggests more cushion, but a very high ratio can mean cash is sitting idle or stock is not selling. The right level depends on the industry, because businesses with fast cash cycles can operate safely with less cover. Look at the trend as well as the level, because a falling ratio can be an early warning even if it is still above one.

Stock and debtors are less liquid than cash. Some current assets may take longer to turn into cash than the calculator assumes, so a business with a high ratio driven by slow-moving stock may be less secure than the figure suggests.

Limits of the calculation

The calculator uses the balance-sheet totals you enter at one date, which can be affected by timing. A large payment just before the date, or a delay in collecting debts, can distort the result. The figures also do not show the timing of cash flows, so a business can have adequate working capital and still face a shortage in a particular month.

Managing the cash cycle

Working capital is shaped by the time it takes to collect from customers, to sell stock and to pay suppliers. Shortening the collection period, reducing slow-moving stock and negotiating reasonable payment terms all improve the position without needing new borrowing. Track these periods alongside the ratio, because they explain why the ratio moves.

Using the result

Use working capital and the current ratio to monitor the short-term health of a business, to compare the position with previous periods, and to plan cash needs. If the position is tight, look at collecting debts faster, managing stock levels and agreeing longer payment terms with suppliers, and review the forecast cash flows for the months ahead.

Forecasting the next few months

A balance-sheet figure shows the position on one day, so also forecast the next three to six months. Map the expected cash receipts and payments month by month, and check whether the cash balance stays above a safe minimum. A business that looks comfortable at one date can run short in a month when a large tax or supplier bill falls due, and a forecast shows this in advance.