Formula to Calculate Working Capital
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)”
Let’s have a look the working capital formula below –
Calculating Working Capital 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.
Working Capital Calculation Example
Let’s take a practical Working Capital calculation Example.
Tithing Inc. has the following information for you –
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
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 Calculator.
|Working Capital Formula =||Current Assets – Current Liabilities|
|0 – 0 =||0|
Calculate Working Capital in Excel
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. Here we look at how to calculate working capital along with practical examples and downloadable excel template. You can learn more about financial analysis from the following articles –