How To Use the Working Capital Formula
Understanding how to calculate your working capital is an important part of managing your business finances. The working capital formula provides a simple way to determine your current financial health. Knowing how to use the working capital formula can help you make informed decisions about how to use your cash and other resources.
Working capital is the difference between current assets and current liabilities. Current assets are liquid assets that can be used to fund operations, such as cash, accounts receivable, and inventory. Current liabilities are short-term obligations, such as accounts payable and short-term debt. The working capital formula is simple:
Working Capital = Current Assets – Current Liabilities
If your current assets exceed your current liabilities, you have positive working capital. This means you have the resources to pay your short-term obligations. On the other hand, if your current liabilities exceed your current assets, you have negative working capital. This is a sign that you may not have enough resources to pay your short-term obligations.
The working capital formula is a useful tool for understanding your business’s financial health. If your working capital is positive, it is a sign that you have enough resources to pay your obligations. Conversely, if your working capital is negative, it is a sign that you may need to find additional sources of funding.
To get a more accurate picture of your working capital, you can use the working capital ratio. This formula measures the ratio of current assets to current liabilities. To calculate your working capital ratio, divide your current assets by your current liabilities.
Working Capital Ratio = Current Assets ÷ Current Liabilities
A ratio of 1.0 or greater indicates that you have sufficient current assets to cover your current liabilities. A ratio below 1.0 indicates that you may need additional sources of funding to cover your obligations.
The working capital formula and ratio are useful tools for understanding your business’s financial health. By calculating your working capital, you can get a better sense of how much cash and other resources you must fund operations. This can help you make informed decisions about how best to use your resources.