Working capital calculator
Working capital is the money left when you take the debts due within a year away from the assets that will turn into cash within a year. Enter your current assets, current liabilities and stock to see your working capital, current ratio and quick ratio.
Working capital and liquidity ratios
Use figures from the same date, ideally a month end.
All three numbers come from the balance sheet. If you don't have one to hand, the balance sheet template sets one out in the UK format, and its fictional example company is the one used below.
How to calculate working capital
Three sums, all from the same balance sheet:
Working capital = current assets − current liabilities
Current ratio = current assets ÷ current liabilities
Quick ratio = (current assets − stock) ÷ current liabilities
Current assets are what the business expects to turn into cash within twelve months: stock, trade debtors, other debtors and prepayments, and money in the bank. Current liabilities are what it must pay within twelve months: suppliers, VAT, PAYE, corporation tax, accruals, overdrafts and the next year's loan repayments.
On a UK company balance sheet, current liabilities appear as "creditors: amounts falling due within one year", and working capital is the line headed net current assets, or net current liabilities when it's negative.
Worked example
The fictional 70-person wholesaler in our balance sheet template ended the year with current assets of £1,271,000, including £418,000 of stock, and current liabilities of £591,000. Working capital is £680,000. The current ratio is 1,271 ÷ 591 = 2.15, and the quick ratio is (1,271 − 418) ÷ 591 = 1.44.
A year earlier the same three figures were £1,129,000, £377,000 and £549,000: working capital of £580,000, a current ratio of 2.06 and a quick ratio of 1.37. Every measure improved, but the detail matters more than the totals. Current assets grew by £142,000, and £104,000 of that was extra stock and trade debtors; cash rose by only £41,000. So before reading the higher ratios as good news, the finance director checks debtor days and looks for slow-moving stock.
How to read the results
- Working capital above zero means short-term assets cover short-term debts. Below zero, they don't. That can be normal for a business whose customers pay before it has to pay its suppliers, but for one that sells on credit and holds stock it's a warning.
- The current ratio makes the same comparison as a multiple. Below 1, short-term debts are bigger than short-term assets.
- The quick ratio leaves out stock, which has to be sold and then paid for before it becomes cash. A wide gap between the two ratios means paying the bills depends on selling stock.
- Higher isn't always better. A very high ratio can mean idle cash, or stock and debtors piling up.
- There's no universal target. Compare with your own month ends and previous years, and check whether a loan or overdraft agreement sets a minimum ratio you have to keep to.
Common mistakes
- Leaving next year's loan repayments in long-term creditors, which flatters every figure here.
- Treating all stock as sellable. Obsolete stock won't become cash, so lean on the quick ratio when stock moves slowly.
- Netting an overdraft against cash instead of showing it as a current liability.
- Reading a single date. A year end can fall at a seasonal peak or trough, and a large supplier payment run on the last day changes the ratios. Look at month ends across the year.
- Confusing working capital with cash. A business can have plenty of working capital and still run short if it's tied up in stock and debtors. Your cash flow forecast shows the timing.
Frequently asked questions
Is working capital the same as net current assets?
Yes. Net current assets is the name UK company accounts use for current assets minus creditors due within one year. When the figure is negative it's shown as net current liabilities.
What's the difference between the current ratio and the quick ratio?
The quick ratio leaves out stock. It shows whether you could pay short-term debts from debtors and cash alone, which matters most when stock is slow to sell.
Does paying suppliers change the ratios?
Paying a supplier from cash leaves working capital unchanged, because current assets and current liabilities fall by the same amount. The ratios do move: with a current ratio above 1, paying creditors raises it. In the example, paying £100,000 of creditors from cash lifts it from 2.15 to 2.38.
How can we improve working capital?
Collect from customers sooner, hold less slow-moving stock and agree fair terms with suppliers. Refinancing a short-term loan over a longer term also raises working capital, because less debt falls due within the year, but it doesn't create any cash.