Financial Statement Analysis
- Liquidity Ratios
- Cash Ratio
- Cash Ratio Formula
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Changes in Net Working Capital
- Change in Net Working Capital (NWC) Formula
- Cash Flow from Operations Ratio
- Cash Flow Per Share
- Cash Reserve Ratio
- Operating Cycle Formula
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Accounting Liquidity
- Solvency Ratios
- Equity Ratio
- Capital Adequacy Ratio
- Cash Reserve Ratio Formula
- Liquidity Risk
- Altman Z Score
- Ratio Analysis (17+)
- Turnover Ratios (17+)
- Profitability Ratios (66+)
- Efficiency Ratios (7+)
- Dividend Ratios (9+)
- Debt Ratios (26+)
Working capital is the amount that is available to the company for the day to day expenses , it is a measure of liquidity, efficiency and financial health of a company and is calculated using a simple formula – “current assets (accounts receivables, cash, inventories of unfinished goods and raw materials) MINUS current liabilities (accounts payable, debt due in on year)”
Working Capital Formula (Table of Contents)
Working Capital Formula
Working capital formula (WC) is one of the most common concepts every business owner should understand. Even every investor should know about it to find out how liquid a firm is at any given moment of time.
WC is also the short term capital the firm needs to run the operation. If the WC is not good enough, then the operation of the firm will suffer.
Let’s have a look at how you can find out the Working Capital formula of a company.
Working Capital Example
Let’s take a practical Working Capital Example to illustrate the working capital formula.
Tithing Inc. has the following information for you –
4.9 (1,067 ratings)
Current Assets –
- Accounts Receivables – $40,000
- Cash – $15,000
- Inventories – $34,000
- Marketable Securities – $45,000
- Prepaid Expenses – $5000
Current Liabilities –
- Accounts Payables – $35,000
- Notes Payables – $15,000
- Accrued Expenses – $12,000
- Short term debt – $34,000
Find out the WC of Tithing Inc.
From the of working capital example, we will first add up the current assets and the current liabilities and then use to calculate the working capital formula.
- The total current assets would be = ($40,000 + $15,000 + $34,000 + $45,000 + $5000) = $139,000.
- The total current liabilities would be = ($35,000 + $15,000 + $12,000 + $34,000) = $96,000.
Using the formula we get –
- WC = Current Assets – Current Liabilities
- Or, WC = $139,000 – $96,000 = $43,000.
It means that the WC of Tithing Inc. is positive and quite healthy.
Colgate Working Capital Calculation
Below is the Snapshot of Colgate’s 2016 and 2015 balance sheet.
Let us calculate the WC for Colgate
- Current Assets (2016) = 4,338
- Current Liabilities (2016) = 3,305
- WC (2016) = 4,338 – 3,305 = $ 1,033 million
- Current Assets (2015) = 4,384
- Current Liabilities (2015) = 3,534
- WC (2015) = 4,384 – 3,534 = $850 million
Explanation of Working Capital Formula
Calculating the Working Capital formula is quite easy.
All you need to do is to look at the balance sheet of the company.
- Current assets are the assets that will offer benefits to the company for the next one year or less. These assets are just opposites of non-current assets because these assets benefit the company for a very short period of time. We also call them short-term assets. Cash, inventories, accounts receivables, marketable securities, prepaid expenses etc. are the examples of current assets.
- Current liabilities, on the other hand, are liabilities that are short-term liabilities of the company. That means the company can expect to pay off these short-term liabilities within a year. These are completely opposite of long-term liabilities. Accounts payables, notes payables, accrued expenses, a part of the long-term debt which need to be paid currently etc. are examples of current liabilities.
When we total the current assets that the company has on their balance sheet and then deduct the total current liabilities, we will get the WC.
WC depicts so many things about a company.
- If a company has a positive WC (meaning the current assets are more than the current liabilities of the company), then the company is in a good position in terms of efficiency, liquidity, and the overall financial health.
- On the other hand, if the company has a negative working capital (meaning the current assets are less than the current liabilities of the company), the company is suffering from inefficiency and illiquidity.
It’s also important for a company to see how long the inventories sit with the company. If the inventories aren’t moving out for long, the capital will remain tied up.
Working Capital Calculator
You can use the following Working Capital Calculator.
|Working Capital Formula =||Current Assets – Current Liabilities|
|0 – 0 =||0|
Working Capital Formula in Excel (with excel template)
Let us now do the same working capital example in excel. This is very simple. You need to provide the two inputs of Current Assets and Current Liabilities.
You can easily calculate working capital in the template provided.
Working Capital Formula Video
This has been a guide to Working Capital formula, its uses along with Working Capital Example. Here we also provide you with Working Capital Calculator with downloadable excel template.