Working Capital Calculator

Understanding Working Capital

Working capital is the difference between your current assets and current liabilities. It measures your ability to pay short-term obligations and fund day-to-day operations. A positive working capital means you have enough liquid resources to cover bills coming due in the next 12 months.

The current ratio divides current assets by current liabilities. A ratio above 1.0 means you can cover your obligations. Most businesses aim for 1.5 to 2.0, though ideal ratios vary by industry. Retailers with fast inventory turnover may operate safely at lower ratios, while seasonal businesses may need higher ratios to cover slow periods.

The quick ratio (also called the acid test) excludes inventory from current assets, giving a more conservative view of liquidity. This matters because inventory can be difficult to convert to cash quickly. A quick ratio of 1.0 or higher indicates you can meet obligations without selling inventory.

The cash conversion cycle measures how long it takes to convert inventory investments into cash from customers. It combines three components: days inventory outstanding (how long inventory sits before selling), days sales outstanding (how long customers take to pay), and days payables outstanding (how long you take to pay suppliers). A shorter cycle means faster cash recovery and less working capital tied up in operations.