Working Capital: What It Is and How to Calculate It

Working Capital = Current Assets − Current Liabilities. Current assets are what you own that can reasonably be turned into cash within a year — cash itself, accounts receivable, short-term investments. Current liabilities are what you owe within that same timeframe — bills, short-term loans, upcoming tax payments.

A business with $40,000 in cash and receivables, and $25,000 in bills and short-term obligations due within the year, has working capital of $15,000 ($40,000 − $25,000). That’s the cushion available if short-term obligations all came due at once.

Positive working capital means you have more short-term resources than short-term obligations — a healthy sign of liquidity. Negative working capital means the reverse, and while some business models function with structurally negative working capital (a well-run subscription business collecting cash upfront, for instance), for most small businesses it’s a warning sign worth addressing.

The two levers are increasing current assets or reducing current liabilities. In practice, that means collecting accounts receivable faster (the biggest lever for most service businesses), keeping a healthy cash reserve, and negotiating longer payment terms with your own vendors so fewer obligations are due imminently.

Working capital is a snapshot at a point in time — what you could cover right now if needed. Cash flow tracks movement over a period — money actually coming in and going out. A business can have positive working capital and still experience a rough month of negative cash flow, or vice versa; the two measures complement each other rather than replacing one another.