Wondering what is working capital and whether your business has enough? It is current assets minus current liabilities: what you could turn into cash within a year, less what you owe within that time.
This explainer sits within our wider coverage of business finance, written for general education.
| Item | Value |
|---|---|
| Working capital formula | Current assets minus current liabilities |
| Working capital ratio formula | Current assets ÷ current liabilities |
| Usual “current” window | Within 12 months |
| Ratio range one guide suggests for most small businesses | 1.2-2.0 |
| Worked florist example | $25,000 positive working capital ($100,000 assets minus $75,000 liabilities) |
These figures come from the Corporate Finance Institute and a guide from Xero published in April 2026. Figures and definitions can change, so check the source before you rely on them.
What working capital measures
Working capital is the difference between a company’s current assets and its current liabilities. The Corporate Finance Institute describes it as a measure of whether a company has enough liquid assets to pay bills due within a year.
The word “current” does the heavy lifting here. Xero’s guide says that when you cannot clearly identify your business’s normal operating cycle, you can assume twelve months, which is why that timeframe is commonly used.
Why care? Bench’s guide cites a 2019 Babson study of small businesses in America. It reported that a lack of access to working capital led to less investment in technology and equipment, reduced pay to employees, and difficulties expanding into new markets.
How to calculate working capital
The standard formula is Working Capital = Current Assets – Current Liabilities, as set out by the Corporate Finance Institute. The steps are short:
- Find total current assets on your balance sheet.
- Find total current liabilities on the same balance sheet.
- Subtract the liabilities from the assets.
- Read the result: above zero is positive, below zero is negative.
Xero’s April 2026 guide gives a retail florist as an example. Cash, inventory and receivables total $100,000, while payables, loans and expenses total $75,000, so the result is $25,000 in positive working capital.
A second example comes from Business Accounting Basics, which uses a small UK company called ABC Computers. Its current assets are £7,500, made up of £5,250 in the bank and £2,250 owed by customers. Its £4,756 of computer equipment is left out because it is a fixed asset used over the longer term.
With current liabilities of £2,506, the sum is £7,500 minus £2,506, which gives positive working capital of £4,994. That does not mean £4,994 is sitting in the bank, because £2,250 of the current assets are unpaid customer invoices. The same source shows the opposite case too: £15,000 of current assets against £20,000 of current liabilities gives -£5,000.
You do not need a finished balance sheet to start. Bench suggests beginning with your bank balances for cash and your invoicing records for accounts receivable. Xero adds that if you use accounting software, you can pull the information directly from your balance sheet and financial reports.
What counts as a current asset or a current liability
Both totals come from the balance sheet, one of the small business financial statements that most bookkeeping guides describe. Bench notes that both figures can be found on your balance sheet.
Typical current assets
Xero lists these as resources you can convert to cash within your operating cycle:
- Cash and bank account balances
- Accounts receivable (money customers owe you)
- Inventory
- Prepaid expenses
- Short-term investments
Typical current liabilities
Xero’s list of obligations you generally must pay within 12 months includes:
- Accounts payable
- Loan and credit payments
- Deferred revenue
- Accrued expenses such as wages and bank fees
Business Accounting Basics, a UK bookkeeping resource, adds that fixed assets such as property, vehicles and equipment are not included because they are normally held for longer-term use. The same page says long-term liabilities are not normally included, although any part of a long-term loan repayable within the next 12 months may be shown as a current liability.
Positive, negative and neutral working capital
Positive working capital means current assets exceed current liabilities, so there is a surplus after short-term bills are covered. Business Accounting Basics cautions that a very high level is not always a sign the business is using its money effectively.
Negative working capital occurs when current liabilities are greater than current assets. The same source says it can warn that a business may struggle with short-term commitments, but it does not always mean financial difficulty.
The Corporate Finance Institute names grocery stores like Walmart and fast-food chains like McDonald’s as examples of businesses that can generate cash very quickly. It contrasts them with capital-intensive manufacturers of heavy equipment and machinery, which usually cannot raise cash quickly.
Neutral working capital, where assets and liabilities are roughly equal, can work if you consistently turn inventory into cash. Xero adds that it leaves little buffer for unexpected expenses or reinvestment.
The ratio, and the limits of the number
The working capital ratio, also called the current ratio, divides current assets by current liabilities. In Xero’s example, $100,000 of assets divided by $75,000 of liabilities gives 1.33, and a ratio above 1.0 means you have more assets than liabilities.
Xero’s April 2026 guide suggests aiming for a ratio between 1.2-2.0 for most small businesses. The same guide says working capital needs vary by industry, so treat any range as a rough guide. What lenders or investors treat as acceptable varies by provider and country.
Keep these limits in mind:
- It is not cash or profit. Business Accounting Basics states that working capital is not the same as cash or profit.
- Some assets are slow to convert. The same source notes that large amounts of stock or unpaid customer invoices can increase working capital while tying up money.
- Definitions differ. The Corporate Finance Institute lists alternatives, such as current assets minus cash minus current liabilities, or accounts receivable plus inventory minus accounts payable.
- It looks only at the short term. It says little about longer-term repayment capacity, which a separate measure, the debt service coverage ratio, is used to examine.
So always check which definition a report or provider uses before you compare numbers.
Frequently asked questions
Is working capital the same as cash?
Show answer
No. Business Accounting Basics states that working capital is not the same as cash or profit, and unpaid customer invoices count as current assets even though the money is not yet in the bank.
What is the working capital formula?
Show answer
Working capital equals current assets minus current liabilities, according to the Corporate Finance Institute. Both figures come from the balance sheet.
Can negative working capital be acceptable?
Show answer
Sometimes. The Corporate Finance Institute says some businesses, such as grocery stores and fast-food chains, can do well with negative working capital because cash comes in quickly. For others it can signal a liquidity problem.
Can a profitable business have working capital problems?
Show answer
Yes. Business Accounting Basics says a profitable business can still experience financial difficulties if too much money is tied up in stock or unpaid customer invoices.
This article is for general information and education only and is not financial, investment, tax or legal advice.
