# Working Capital – Definition, Formula and How to Calculate

##### Yarab A | Jan-20-2020

Working capital is the fuel which runs the business. To ensure business continuity and sustained growth, you need working capital. Not managing your working capital efficiently, will severely impact the day-to-day operations of the business.

## What is working capital?

Working capital refers to money available for carrying on the day to day business operations. Working capital represents the financial liquidity of the business. It is often said that the way you manage working capital will make a big difference in the growth and continuity of business.

The concept of working capital includes current assets and current liabilities. The difference between these two is the working capital available for business to fund its daily operations and seed further growth.

## Formula to calculate working capital?

To calculate working capital, you need to consider all the current assets and current liabilities of the business. Current assets are those which you can convert into cash in the short-term, usually, 1 year and current liabilities include all short-term debts. Following are some of the major attributes of working capital.

• Current assets
• Current liabilities

The formula to calculate working capital is given below

Working Capital = Current Assets – Current Liabilities.

Working capital is simply a difference between your current assets and current liabilities. If your current assets exceed current liabilities, it said to have positive working capital. Else, it is negative.

## How to calculate working capital ratio?

The working capital ratio gives quick insights about the health of the business in terms of ratio. The working capital ratio is derived by dividing the current assets by current liabilities.

Working Capital Ratio = Current Assets/Current Liabilities.

Working capital ratio of above 1 indicates the business has enough cash to pay its short debts. Similarly, a working capital ratio below 1 indicates negative working capital and business is facing some sort of financial difficulties in paying their debts.