How to calculate working capital

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Page written by Ashlyn Brooks. Last reviewed on February 5, 2025. Next review due October 1, 2026.

Working capital fuels so many aspects of your day-to-day business operations, which as a business owner, you’ve likely encountered. But here at Swoop, we’re all about going the extra mile to make sure you know the ‘what’ behind the ‘why’ when it comes to financial factors.

This guide explains what working capital is, how to calculate it, and why it matters for your cash flow management.

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What is working capital?

Working capital is the measurement of your company’s short-term financial health and operational efficiency. It represents the difference between current assets and current liabilities, which in turn, shows if a business has enough short-term assets to cover its immediate obligations.

Current assets typically include:

Cash and cash equivalents which are all of the money the company has available.
Accounts receivable or the invoices due from customers.
Inventory which is the goods or materials that are not yet sold.
Prepaid expenses or the expenses that you paid for ahead of time.

Current liabilities typically include:

Accounts payable or the money you owe to your vendors.
Short-term loans or lines of credit which is money you owe to your bank or financial institution.
Taxes payable which are the taxes you owe.
Wages payable or the cash that is owed to your employees or contractors.

What is the formula to calculate working capital?

The formula for calculating working capital is; Working Capital = Current Assets – Current Liabilities

Again, this calculation provides a snapshot of your company’s liquidity. If you plug in the numbers and it’s positive this typically means you have more short-term assets than liabilities, while a negative result can mean potential liquidity issues.

Keep in mind, that current assets are resources expected to be converted into cash within 12 months. Current liabilities are what’s due within 12 months. Anything over 12 months then shifts into long-term liabilities/ long-term assets.

Example: Working capital calculation

Let’s break this down with a practical example using ‘company A’:

Company A’s balance sheet data:

Current assets: $150,000
- Cash: $50,000
- Accounts receivable: $60,000
- Inventory: $40,000
Current liabilities: $100,000
- Accounts payable: $50,000
- Short-term loan: $30,000
- Taxes payable: $20,000

Working Capital Calculation: $150,000 (Current Assets) – $100,000 (Current Liabilities) = $50,000 (Positive Working Capital)

Visualisation:

Current Assets
Cash	$50,000
AR	$60,000
Inventory	$40,000
Current Liabilities
AP	$50,000
Short-term loan	$30,000
Taxes	$20,000
Working capital	$20,000

This means Company A has a positive working capital of $50,000, so it has enough short-term assets to cover its immediate financial obligations.

Positive working capital vs. Negative working capital

Working capital can be either positive or negative, and each scenario has distinct implications for a business’s financial health. Positive working capital indicates that a business has sufficient current assets to cover its short-term liabilities, offering flexibility to handle unexpected expenses or seize investment opportunities. It also reflects strong liquidity and overall financial stability.

On the other hand, negative working capital arises when current liabilities exceed current assets, which may signal liquidity challenges or the need for external financing. In such cases, businesses might face delayed payments to suppliers or miss opportunities for growth.

4 Limitations of working capital

Working capital is a very useful metric for businesses but it isn’t perfect and has some limitations that can make it less than ideal.

Changing values: Working capital is constantly shifting. In an active business, most current asset and liability accounts frequently change. By the time financial data is gathered, the working capital position may already be outdated.
Asset devaluation: Some assets can lose value quickly. For example, customers may default on payments, inventory might become outdated or stolen, or even cash could be stolen, all of which impact working capital.
Nature of assets: The calculation doesn’t account for the type of assets involved. A company with positive working capital made up mostly of accounts receivable could still face cash flow problems if customers are late paying invoices.
Unrecorded debt: The calculation assumes all liabilities are accounted for. In fast-paced settings or during mergers, overlooked agreements or unprocessed invoices can make working capital figures inaccurate.

Is negative working capital always a bad thing?

Not necessarily. Negative working capital is not always a sign of poor financial health; its implications depend on the industry and business model.

For example, retail and food businesses, such as grocery stores or fast food chains, often operate with negative working capital because they sell inventory quickly and collect cash before paying suppliers.

Same principle with tech startups, in early growth stages, they may show negative working capital due to large upfront investments before generating revenue. In some cases, a company with a fast cash cycle might show it’s running efficiently even with negative working capital. However, having negative working capital for a long time can cause cash flow problems, especially if sales drop or costs go up unexpectedly.

How working capital affects cash flow

Working capital has a direct impact on determining cash flow availability for a business. Changes in working capital impact cash flow in the following ways:

Increased working capital (positive): If current assets grow faster than current liabilities, cash flow might be strained due to excess inventory or slow-paying customers.
Decreased working capital (negative): If current liabilities grow faster than current assets, it may signal liquidity issues, but could also indicate efficient inventory turnover.

Example of working capital affecting cash flow

Let’s take a business that gives its customers extra time to pay their invoices. This increases accounts receivable and working capital, but it can also leave the business with less cash on hand to cover immediate expenses. On the other hand, if the business negotiates more time to pay its suppliers, it reduces working capital but frees up cash, improving cash flow.

This is common in businesses like retail, manufacturing, and construction, where payment cycles can vary between receiving payments from customers and paying suppliers.

How Swoop can help

At Swoop Funding, we specialize in helping businesses like yours manage working capital more effectively by providing access to funding solutions tailored to your cash flow needs. Whether you need to cover short-term liabilities, invest in growth, or manage seasonal fluctuations, our platform simplifies the process.

Take control of your cash flow today. Register with Swoop today and discover how to strengthen your working capital position.

Written by

Ashlyn Brooks

Ashlyn is a personal finance writer with experience in business and consumer taxes, retirement, and financial services to name a few. She has been published in USA Today, Kiplinger and Investopedia.

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