Working capital is current assets minus current liabilities at a stated date.
It is a balance-sheet measure of short-term resources after short-term obligations, rather than a separate pot of cash. Return to the business plan glossary for related terms.
Formula and calculation
Working capital = Current assets − Current liabilities
Current assets commonly include cash, trade receivables and inventory; current liabilities commonly include trade payables, accrued expenses and the current portion of debt. Use the classifications in the applicable financial statements. Operating working capital is a separately defined measure that often excludes cash and financing debt; do not use the labels interchangeably.
Worked example: illustrative figures
Illustrative example: Cedar Parts is a fictional repair-parts retailer. At an illustrative month-end it has $20,000 cash, $25,000 customer receivables and $35,000 inventory. Current liabilities are $30,000 supplier payables, $10,000 accrued expenses and $15,000 current debt. All figures use one consistent currency, USD or CAD.
| Item | Amount |
|---|---|
| Current assets: $20,000 + $25,000 + $35,000 | $80,000 |
| Current liabilities: $30,000 + $10,000 + $15,000 | $55,000 |
| Working capital | $25,000 |
| Current ratio: $80,000 ÷ $55,000 | About 1.45 |
Working capital is $80,000 − $55,000 = $25,000. This is not $25,000 of spendable cash: $60,000 of current assets consists of receivables and inventory. A $10,000 cash purchase of inventory swaps one current asset for another and leaves total working capital unchanged at purchase, while reducing cash available for immediate bills.
How to interpret the result
Positive working capital does not guarantee that bills can be paid on time. Inventory may sell slowly and receivables may be overdue. Negative working capital requires context: some businesses collect from customers before paying suppliers, while others face a genuine shortfall. Review due dates, seasonality and asset quality.
Using this measure in a business plan
Forecast inventory, collection days and supplier payment terms rather than using a single unexplained working-capital allowance. Connect the resulting balances to cash flow and include short-term debt repayments. Growing sales can require more cash tied up in stock and unpaid invoices before customers pay.
For help connecting assumptions to the financial statements, see our financial modelling services and business plan writing services.
Related glossary entries
Frequently asked questions
Is working capital the same as cash?
No. It includes other current assets and deducts current liabilities. Positive working capital can coexist with a low cash balance.
What is the difference between working capital and the current ratio?
Working capital subtracts current liabilities from current assets and is an amount. The current ratio divides current assets by current liabilities and is a ratio.
Does more inventory always improve liquidity?
No. Inventory uses cash and may take time to sell. Assess saleability, payment timing and stock requirements alongside the balance-sheet total.