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Working capital is the difference between a business's current assets and current liabilities. It measures short-term liquidity — the operational buffer that keeps daily business running without a cash crisis.
The formula
Working Capital = Current Assets − Current Liabilities
If current assets are $500k and current liabilities are $200k, working capital is $300k. This $300k represents the operational cash cushion.
Current Ratio
Current Ratio = Current Assets / Current Liabilities
At $500k / $200k = 2.5x. For every $1 of short-term obligations, there are $2.50 of liquid assets available.
Quick Ratio (Acid Test)
Quick Ratio = (Current Assets − Inventory) / Current Liabilities
The Quick Ratio excludes inventory because converting stock to cash takes time. It's a more conservative measure of immediate liquidity.
Benchmarks
| Current Ratio | Assessment |
|---|---|
| > 2.0x | Strong — ample short-term buffer |
| 1.5–2.0x | Healthy — comfortable liquidity |
| 1.0–1.5x | Tight — limited margin for error |
| < 1.0x | Warning — potential liquidity risk |
Negative working capital
Some businesses — particularly SaaS and subscription companies — can operate with negative working capital. If customers pay annually upfront (creating deferred revenue = a current liability), working capital will be negative while the business is perfectly healthy.
Amazon famously ran negative working capital for years: customers paid instantly, while Amazon paid suppliers on 30–45 day terms. The gap funded operations.
Working capital and the Cash Conversion Cycle
Working capital is the static balance; the Cash Conversion Cycle is the dynamic flow. A business might have positive working capital but a terrible CCC if receivables take 90+ days to collect. Track both metrics together.
Frequently asked questions
What does this calculator do? Calculate working capital, current ratio, quick ratio, and days working capital from your current assets and liabilities.