Working Capital: Formula, Example and What It Means
Working capital is current assets minus current liabilities. The formulas, a worked example, when a negative figure is a problem and when it is the business model, and the three levers that move it.
Marcus Smolarek
Gründer von finban
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In short: Working capital is current assets minus current liabilities — what is left of the cash tied up in day-to-day operations once the short-term debts are covered. This page gives the formulas, works through an example, explains when a negative figure is a problem and when it is the business model, and names the three levers that actually move it.
What working capital is
Working capital is the difference between current assets and current liabilities.
It answers one question: of the capital that is in short-term circulation — inventory, receivables, cash at the bank — how much is left once everything due within a year has been paid?
If something is left, working capital is positive, and the long-term assets are financed long-term. If nothing is left, short-term debt is partly funding what is tied up in the business for the long run: machines, fittings, vehicles.
The abbreviation is WC, and NWC for net working capital. In German accounts you will find it as Betriebskapital or Nettoumlaufvermögen.
The formulas
| Metric | Formula | Result | A high figure means | A low figure means |
|---|---|---|---|---|
| Working capital | current assets − current liabilities | an amount | a large buffer, but also a lot of capital tied up | little room; below zero, short-term debt funds long-term assets |
| Net working capital | usually the same; where a distinction is drawn: (current assets − cash) − (current liabilities − short-term debt) | an amount | much capital sitting in inventory and receivables | operationally lean — or underfunded |
| Working capital ratio | current assets ÷ current liabilities × 100 | a percentage | the same as above, but comparable between companies of different size | below 100 % working capital is negative |
The third row is the same calculation as the current ratio: working capital as an amount, the ratio as a proportion. Seen side by side, they are one fact in two units.
Working capital and net working capital — the difference that usually is not one
In most sources the two terms mean the same thing: net current assets. The German Gabler Wirtschaftslexikon treats them as synonyms outright. If you find two different formulas online, you have not hit a gap in your knowledge — you have hit an inconsistency in usage.
Where a distinction is drawn, net working capital means the operating version: cash is taken out of current assets and bank debt out of current liabilities. What remains is what the running business ties up — inventory plus receivables minus trade payables.
That narrower version is the more useful one for steering, because it shows exactly the three items you can act on and leaves out everything that comes from financing. The wider version is what is meant in annual accounts and in a bank conversation.
So when someone quotes you a working capital figure, the first question is: is the bank in it or not?
A worked example
The figures are an invented example, and deliberately the same ones used on the German pages so the two do not drift apart.
| Position | Amount |
|---|---|
| Cash and bank | €60,000 |
| Short-term receivables | €140,000 |
| Inventory | €90,000 |
| Current assets | €290,000 |
| Current liabilities | €250,000 |
From that:
- Working capital = 290,000 − 250,000 = €40,000
- Working capital ratio = 290,000 ÷ 250,000 × 100 = 116 %
Both are the same statement. The amount says: after covering every short-term debt, €40,000 of short-term capital remains. The percentage says: current assets cover current liabilities 1.16 times over.
And neither says anything about timing. The €140,000 of receivables might arrive in two weeks or in four months; the €250,000 might fall due tomorrow or spread across the year. That is what the last section is about.
Negative working capital
Negative working capital means current liabilities exceed current assets — the working capital ratio is below 100 %. Short-term debt is part-funding what is tied up long term.
Whether that is a problem depends entirely on the business model:
- It is a problem when a company holds inventory and waits a long time for customer payments while having to pay quickly itself. It then runs permanently on its overdraft, and the only reason it works is that the facility keeps being renewed.
- It is normal when customers pay immediately and suppliers grant long terms — retail, hospitality, subscription businesses billed in advance. There, negative working capital is not a hole; it is financing by your own revenue.
So the question is never "positive or negative" but: what makes the figure what it is, and which way is it moving? A company whose working capital falls over four quarters has a signal, even while it is still positive.
Improving working capital
There are exactly three levers, and all of them sit in the operating business:
| Lever | What happens | How fast it works |
|---|---|---|
| Collect receivables faster | shorter payment terms, invoice on the day of delivery, a dunning process that actually runs | weeks |
| Reduce inventory | less capital in stock, shorter holding periods | months |
| Extend supplier terms | pay later without losing early-payment discounts | weeks to months |
The first is almost always the largest and the cheapest.
Two caveats. The effect is one-off: the balance drops once to a new level and stays there. Anyone selling it as an annual saving is doing the arithmetic wrong. And the figure can be flattered at the reporting date — a payment made on 2 January instead of 30 December improves working capital without anything about the business having changed.
What does not help: revenue growth. More revenue on the same payment terms increases receivables and inventory at the same time, tying up more capital, not less. Growth consumes working capital before it produces any.
Working capital management
Working capital management is the ongoing steering of those three items with one aim: tie up as little capital as possible in circulation without damaging your ability to deliver or your customer relationships.
The matching metric is the cash conversion cycle — the time from paying for goods to receiving the customer's money. It translates working capital from an amount into days.
The difference between the metric and the management: working capital is a snapshot from the balance sheet, management is an activity. The number measures; the management changes.
What the figure does not tell you
Working capital is a point-in-time value. It knows nothing about due dates.
A company with €40,000 of working capital can be unable to pay next week if the liabilities fall due in January and the receivables arrive in March. Another with negative working capital can sleep soundly because its customers pay cash. The metric does not distinguish between the two.
To know whether the money will be there, you do not need a better ratio but a different calculation: a liquidity plan that carries cash in and cash out forward with dates attached. The balance sheet view belongs in the bank conversation; the plan belongs in the running month.
Related: cash flow as the result that comes out of it, operating cash flow as the part that judges the business, and how to calculate cash flow for the line-by-line scheme.
Frequently asked questions
What is working capital in simple terms?
Working capital is what is left of a company's short-term capital once its short-term debts are deducted: current assets minus current liabilities. In German accounts it appears as Betriebskapital or Nettoumlaufvermögen.
What is the working capital formula?
Working capital = current assets − current liabilities. With €290,000 of current assets and €250,000 of current liabilities that gives €40,000. Expressed as a ratio — current assets ÷ current liabilities × 100 — it is 116 %.
What is the difference between working capital and net working capital?
In most sources, none: both mean net current assets. Where a distinction is drawn, net working capital is the operating version, with cash and short-term bank debt taken out — leaving inventory plus receivables minus trade payables.
What does negative working capital mean?
That current liabilities exceed current assets, so short-term debt part-funds long-term assets. For business models with immediate customer payment and long supplier terms this is normal. For everyone else it is a reason to go through the coming months' due dates one by one.
What is a good working capital figure?
There is no general target, and any number quoted is industry-dependent. A retailer taking cash works with structurally different figures from a machine builder running long projects. What is meaningful is your own trend across several quarters, not a borrowed average.
How do working capital and the current ratio relate?
The working capital ratio is arithmetically the current ratio: current assets divided by current liabilities. The only difference is the unit — working capital as an amount, the ratio as a percentage.
Does working capital tell you whether a company can pay its bills?
Only to a limited degree. It is a point-in-time value from the balance sheet and knows nothing about due dates. Whether the money will be there next quarter is answered only by a liquidity plan that carries cash in and cash out forward with dates attached.