What is Working Capital?

The formula
Reading the result

Working capital is your current assets minus your current liabilities: what the business has that will turn into cash within a year, less what it has to pay within a year. If the result is positive, the business has more coming in over the next year than it owes over that time. If it's negative, short-term bills are larger than the short-term assets available to pay them.

Billed publishes this page. The definitions below come from the open textbook Principles of Accounting, Volume 1: Financial Accounting (OpenStax), section 2.3, the chapter 2 key terms and Appendix A: Financial Statement Analysis, all opened on October 29, 2026. This is general information, not accounting or tax advice; ask your accountant where judgment is needed.

The formula

Working capital = current assets − current liabilities

OpenStax defines working capital as "current assets less current liabilities" and explains that it "is used to assess the dollar amount of assets a business has available to meet its short-term liabilities."

Both numbers come from the current sections of your balance sheet:

Current assets: cash, accounts receivable (money clients owe on invoices), inventory and prepaid expenses.
Current liabilities: accounts payable, accrued expenses such as wages owed, client deposits for work not yet done, and the part of any loan due within a year.

Reading the result

OpenStax: "A positive working capital amount is desirable and indicates the business has sufficient current assets to meet short-term obligations (liabilities) and still has financial flexibility."

And for a negative result: "A negative amount is undesirable and indicates the business should pay particular attention to the composition of the current assets (that is, how liquid the current assets are) and to the timing of the current liabilities."

Bigger isn't automatically better. Appendix A notes that "too large of a difference may indicate that the company may not be correctly using their assets to grow the business." It also says lenders look at it: "Before a lender extends credit, they will review the working capital of the company to see if the company can meet their obligations."

Working capital as a ratio

OpenStax points out a limit of the dollar figure: "One limitation of working capital is that it is a dollar amount, which can be misleading because business sizes vary." Two ratios use the same figures:

Current ratio = current assets ÷ current liabilities. OpenStax: "A ratio of greater than one indicates that the firm has the ability to meet short-term obligations with a buffer, while a ratio of less than one indicates that the firm should pay close attention to the composition of its current assets as well as the timing of the current liabilities."
Quick ratio = (cash + short-term investments + accounts receivable) ÷ current liabilities. Appendix A describes it as a narrower version of the current ratio that leaves out inventory and prepaid expenses. See liquidity and the quick ratio.

For how these fit with other ratios, see financial ratio analysis.

Worked example: one balance sheet, three changes

The business and figures here are a sample, invented for this example.

A small studio's current items at month end:

Current assets: cash $18,000 + accounts receivable $24,000 + inventory $10,000 + prepaid insurance $2,000 = $54,000.
Current liabilities: accounts payable $15,000 + wages owed $5,000 + client deposits $4,000 + loan principal due within 12 months $6,000 = $30,000.

The figures:

Working capital: $54,000 − $30,000 = $24,000.
Current ratio: $54,000 ÷ $30,000 = 1.8.
Quick ratio: ($18,000 + $24,000) ÷ $30,000 = $42,000 ÷ $30,000 = 1.4.

Change 1: a client pays an $8,000 invoice. Cash rises to $26,000 and accounts receivable falls to $16,000. Current assets stay $54,000, so working capital stays $24,000. Collecting changes what the current assets are made of, not their total.

Change 2: the studio pays $5,000 of its payables in cash. Current assets fall to $49,000 and current liabilities to $25,000. Working capital stays $49,000 − $25,000 = $24,000, while the current ratio rises to $49,000 ÷ $25,000 = 1.96.

Change 3: the studio takes a $10,000 loan repayable over three years, with nothing due in the next 12 months. Cash and current assets rise to $59,000, current liabilities stay $25,000, so working capital rises to $59,000 − $25,000 = $34,000. The new loan is a long-term liability, so it isn't in the current figures until part of it falls due within a year.

What changes working capital

Working capital moves when a current item changes without an equal change on the other side of the current sections:

It rises with profit kept in the business, cash from long-term borrowing or owner contributions, and selling equipment for cash.
It falls with losses, owner draws, buying equipment with cash, and paying off the long-term part of a loan early. Paying the part already due within a year doesn't change it, because that part is already a current liability.
It doesn't change when one current item swaps for another, such as collecting a receivable or paying a bill, as in the example.

Collecting receivables sooner and keeping inventory lean doesn't raise working capital by itself, but it turns current assets into cash you can use. See accounts receivable turnover and the cash flow statement.

Where Billed fits

Billed publishes this page. Accounts receivable is part of current assets, and Billed's invoice software page says "Invoice reports show which invoices are paid, partially paid or past due" and that you can "Set a due date on each invoice so your client knows when to pay." Its financial reporting page says "Each report can be filtered by date range and exported." Its expense tracking page covers recording what the business spends. Working capital itself comes from your balance sheet, which you or your accountant prepare from your books.

When this guide isn't for you

This page covers working capital for small businesses. If you have loan covenants that set working capital or current ratio requirements, hold large inventories, or prepare statements for investors, work with an accountant on how each figure is defined.

Frequently Asked Questions

How do you calculate working capital?

Subtract current liabilities from current assets. For example, current assets of $54,000 and current liabilities of $30,000 give working capital of $24,000.

What is the difference between working capital and the current ratio?

They use the same two figures. Working capital subtracts current liabilities from current assets and gives a dollar amount. The current ratio divides current assets by current liabilities and gives a ratio, which makes businesses of different sizes easier to compare.

Is negative working capital bad?

OpenStax describes a negative amount as undesirable and says the business should pay attention to how liquid its current assets are and when its current liabilities fall due. It means short-term liabilities are larger than short-term assets, so ask your accountant how the timing works for your business.

What is a good current ratio?

OpenStax says "A ratio of greater than one indicates that the firm has the ability to meet short-term obligations with a buffer," and a ratio below one means paying close attention to current assets and the timing of liabilities. It doesn't set one target for every business, so compare with your own past periods and ask your accountant.

Does collecting receivables increase working capital?

No. Collecting a receivable swaps one current asset for another, so the total stays the same. It does increase the cash you have available.

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What Is Working Capital? A Simple Guide for Small Business