Working capital tells you how well your business can manage the tension between outflows and inflows, such as buying inventory before you sell it, paying suppliers before customers pay you, or covering payroll while waiting on receivables. It shows up in decisions about growth, funding, risk, and even pricing strategy.

Below, you'll find a practical guide to working capital formulas: what they are, how to interpret them, and how to use them to make better decisions for your business.

What's in this article?

• What is the formula for working capital?
  
• How do you calculate net working capital?
  
• What is the working capital ratio formula?
  
• How do you calculate changes in working capital?
  
• How do you calculate required working capital?
  
• How do you use working capital formulas in business?
  

What is the formula for working capital?

Working capital is a snapshot of your company's short-term financial health. It tells you how much cash you have available after you've covered your short-term financial obligations (i.e. bills due in the next 12 months). This metric reflects how well your company matches cash inflows with cash outflows over the short term.

Here's the formula:

Working Capital = Current Assets − Current Liabilities

Current assets include:

• Cash and cash equivalents

• Accounts receivable (AR) – i.e. customer invoices yet to be paid

• Inventory

• Short-term investments

• Other assets expected to convert to cash within 12 months

Current liabilities include:

• Accounts payable (AP) – i.e. money you owe suppliers

• Short-term debt

• Accrued expenses – e.g. taxes or interest payments on loans

• The current portion of long-term debt

Positive working capital means you have more short-term assets than liabilities. You're in a position to pay what you owe and still have liquidity to manage daily operations, invest in growth, or handle surprises.

Negative working capital means your short-term debts exceed your short-term resources. That's a signal you might struggle to pay suppliers, cover payroll, or handle day-to-day expenses, unless cashflow is extremely predictable or you're in a business model that has fast inventory turnover and short cash cycles.

How do you calculate net working capital?

In most cases, net working capital (NWC) means the same thing as working capital. It's the net amount of liquid resources your business has after subtracting what it owes in the short term. There are a few different ways to calculate NWC – some broader and some more focused.

Standard formula

Net Working Capital (NWC) = Current Assets − Current Liabilities

This gives you a snapshot of overall short-term liquidity. Unless specified otherwise, this is usually the definition businesses and analysts are using.

Operational formula

Operating Working Capital (OWC) = Operating Current Assets − Operating Current Liabilities

Some analysts adjust the calculation to filter out non-operating components. They exclude cash and short-term debt because they're often related to financing strategy rather than the operating side of the business. If you want to evaluate how your day-to-day operations are affecting liquidity without distractions from financing decisions, this version can be more useful.

When calculating net working capital for your business, you should:

• Use the standard formula for quick liquidity checks or general financial modelling

• Use the version that filters out non-operating components for operational analysis

Always use a consistent definition and clarify which one you're using for cleaner comparisons across periods or companies.

What is the working capital ratio formula?

The working capital ratio, also known as the current ratio, looks at the relationship between a company's short-term assets and liabilities. Instead of showing the difference between the two, like the standard working capital formula does, this version shows the proportion. It tells you how many dollars of current assets the business has for every dollar of short-term liabilities.

Here's the formula:

Working Capital Ratio = Current Assets ÷ Current Liabilities

A ratio above 1.00 shows that the business can cover its short-term obligations. A ratio below 1.00 signals that current liabilities exceed current assets, which could mean a short-term cash shortfall. A ratio substantially above 2.00 might seem strong, but could point to underutilised resources, such as excess inventory or idle cash.

Some businesses and industries, such as supermarkets or fast fashion, routinely operate with low working capital ratios because of quick inventory turnover and fast cash cycles. Others, such as manufacturing or construction, might need a higher buffer to manage long production timelines or payment lags.

Here are two examples:

• Company A: The business has $2 million in current assets and $1 million in current liabilities. By following the formula (i.e. dividing $2 million in assets by $1 million in liabilities), its working capital ratio comes out to 2.00.

• Company B: The business has $5 million in current assets and $4 million in current liabilities. This makes its working capital ratio 1.25.

  • $5 Million ÷ $4 Million = 1.25 Working Capital Ratio
    

Both companies have the same dollar amount of working capital: $1 million. But their ratios represent different stories. Company A has a 2:1 cushion of assets to liabilities. It's stable and liquid. Company B, while it has more absolute capital, has a slimmer margin for error.

This is the strength of the ratio: it normalises the numbers and makes them easier to compare across companies, over time, or between industries. It doesn't just tell you how much liquidity you have, but how much relative to what you owe.

How do you calculate changes in working capital?

Working capital moves as your business moves. Your sales cycles, payment terms, and spending patterns all influence it.

For example:

• Growing sales might boost accounts receivable, but if customers are slow to pay, that growth ties up cash.

• Stocking up on inventory for peak season increases assets but can drain liquidity until those goods are sold.

• Paying down short-term loans improves your liabilities position, but can reduce working capital if not offset by new income or incoming receivables.

Tracking how this metric changes over time helps you understand how cash is flowing through your operations.

Here's the formula:

Change in Working Capital = Beginning NWC − Ending NWC

A rise in working capital isn't always good news. When working capital increases, it can mean more cash is tied up in receivables or inventory. That's why changes in working capital show up in the operating cashflow section of your cashflow statement.

Common drivers of an increase in working capital include:

• Inventory buildup ahead of a seasonal spike

• Longer customer payment terms (i.e. rising receivables)

• Payables paid down faster than usual

Common drivers of a decrease in working capital include:

• Faster collections on receivables

• Leaner inventory levels

• Delayed payments to suppliers

What matters for financial planning is being able to anticipate these movements. Smart companies model expected changes in working capital and ensure they're covered by existing cash, credit facilities, or operational discipline.

How do you calculate required working capital?

Your business's required working capital – also called its working capital requirement (WCR) – is how much it needs to keep operations running. It's the amount you need to cover the timing gap between cash going out and cash coming in.

Here's the formula:

Working Capital Requirement (WCR) = (Inventory + Accounts Receivable (AR)) − Accounts Payable (AP)

This formula strips down the calculation to the main components of your operational cashflow:

• Accounts receivable (AR): Money tied up waiting for customers to pay

• Inventory: Money tied up in goods you haven't sold yet

• Accounts payable (AP): Money you haven't yet paid to suppliers

Following the formula, if you're holding $50,000 in inventory, have $30,000 in receivables, and owe $20,000 in payables, your WCR is $60,000. That's how much working capital your business needs on a rolling basis to cover the lag between spending and earning.

As your business grows, WCR often grows with it – more sales usually mean more stock, more receivables, and often, more money tied up. Tracking this helps you plan. You can forecast when you'll need more cash to keep things moving, or when you're freeing some up.

How do you use working capital formulas in business?

Imagine that you run an e-commerce company that sells electronics online. You've built steady momentum and are heading into a high-sales season. You need to know: do you have enough working capital to handle the volume? If not, how big is the gap – and how should you fill it?

Here's how working capital formulas help answer those questions, step by step.

Establish your baseline

You start with a simple calculation.

• Current assets: $120,000

• Current liabilities: $100,000

• Your working capital = $20,000

• Your working capital ratio = 1.20

That's not unsafe, but it's tight, especially heading into a period of high demand.

Estimate your working capital requirement

Based on sales forecasts, you expect to:

• Increase inventory by $50,000

• Extend $20,000 more in customer credit

• Take on $10,000 more in payables

WCR = ($50,000 in Inventory + $20,000 in Receivables) − $10,000 in Payables = $60,000

Your existing $20,000 won't cut it. You'll need another $40,000 to support the peak season's activity without risking a liquidity crunch.

Solve the gap

At this point, you examine your financing options. You process payments through Stripe, and based on your payment volume, you're eligible for a Stripe Capital advance. The funding arrives quickly and is repaid automatically as a small percentage of future sales, so repayment adjusts with your cashflow.

You take the $40,000 advance, cover your expanded inventory needs, and move confidently into the season.

Monitor operational working capital

As sales ramp up, your attention shifts to how well your operations are using that capital.

• Inventory starts converting into sales.

• Receivables grow as customers buy on credit.

• Payables are due over the next few weeks.

It's a lot of capital tied up, but the growth was planned. You also keep an eye on how quickly receivables are being collected and how well inventory is selling – early signals that determine how fast that capital will cycle back into cash.

Post-season unwind

Once the season ends:

• Receivables are collected

• Inventory is sold down

• Payables are paid

• The Stripe Capital advance is gradually repaid from daily revenue

By the first quarter, you're back to a leaner balance sheet, with working capital up to $30,000 thanks to retained profits from the season. Over the year, your working capital continues to grow. That helps refine planning going forward.

This is how working capital formulas function in practice. They help quantify how much liquidity you need, they surface early signals that affect future cash – such as growing receivables or excess inventory – and they show whether operational growth is generating or consuming cash over time.