Working capital formula
Working capital = current assets - current liabilities
Current assets commonly include cash, receivables, and inventory. Current liabilities commonly include payables and short-term obligations, classified under the applicable accounting framework.
Hypothetical example: Current assets of $180,000 less current liabilities of $120,000 produce $60,000 of working capital.
Working capital is not cash on hand
A positive balance can coexist with a cash shortage when inventory is slow-moving or invoices remain unpaid. Assess the quality and timing of assets alongside payment obligations.
Collecting an existing receivable generally moves value from receivables to cash. Before fees or other effects, that exchange does not change total current assets or net working capital, but it improves immediate liquidity.
Using the measure
Review working capital alongside cash forecasts, invoice aging, inventory turnover, and operating cash flow. A negative balance needs context; business models and payment cycles differ.
Operating working capital is a separately defined measure that often excludes cash and financing balances. State its components before comparing it with the broader balance-sheet measure.
Source: SEC guide to financial statements.