The formula
Working capital equals current assets minus current liabilities. Current assets are cash and things expected to turn into cash within a year, such as receivables and inventory. Current liabilities are bills due within a year, such as payables, credit card balances, payroll liabilities and the part of a loan due in the next twelve months.
Say a business has $40,000 in cash, $25,000 in receivables and $15,000 in inventory, for $80,000 of current assets. It owes $30,000 in payables and $10,000 in other short-term obligations. Working capital is $80,000 minus $40,000, which is $40,000.
What the number means
Positive working capital means the business could cover its short-term obligations from short-term assets. Negative working capital means it could not, at least on paper, and may need new cash, faster collections or longer payment terms with suppliers.
The figure is a snapshot at one date. A business can look fine on the last day of the month and run short in the middle of it, so look at cash flow as well.
Quality matters as much as amount
Not all current assets are equally useful. Cash pays bills today. Receivables depend on customers paying on time. Inventory depends on selling it. A business with $40,000 of working capital made up mostly of slow inventory is in a weaker position than one with the same amount in cash.
Look at the age of your receivables and how long inventory sits, since these show how quickly assets turn into cash.
When it is too high or too low
Low working capital can mean you are stretched, and high working capital can mean cash is sitting idle or customers are paying slowly. Compare the number to your own history and to businesses like yours, since a restaurant and a consulting firm carry very different amounts.
A rule of thumb is useful only as a starting point. What matters is whether you can pay your bills on time through your slowest month.
Ways to improve it
Collect receivables faster, negotiate longer payment terms with suppliers, keep inventory lean, and keep short-term debt from piling up. Moving a short-term loan into a longer one changes the number on paper but not your cash, so look at the real payment schedule.
Review the figure every month with your balance sheet. A free days sales outstanding or inventory turnover calculator helps you see which part to work on first.
A month-by-month view
Calculate working capital at the end of each month and chart it for a year. Seasonal businesses often see it swell after a busy season and shrink before the next one, so a single month hides the pattern.
If the low point approaches zero, plan for it: line up a credit line before you need it, collect deposits, or time big purchases for when cash is strong. Lenders look more kindly on an owner who planned than on one who asked in a panic.
Common questions
Is working capital the same as cash?
No. Cash is one part of it. Working capital also counts receivables and inventory, and it subtracts short-term obligations.
Can working capital be negative?
Yes. It is common in some businesses that collect cash before paying suppliers. It still deserves attention if cash runs short.
How often should I calculate it?
Monthly, with your balance sheet, so you can see the trend.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.