What is Working Capital?

The formula is simple — current assets minus current liabilities — but what it reveals is not. Current assets include cash, accounts receivable, inventory, and other items expected to be converted to cash within a year. Current liabilities include accounts payable, short-term loans, accrued expenses, and the current portion of long-term debt. A healthy manufacturer might hold €100,000 of current assets against €60,000 of current liabilities, giving €40,000 of working capital and a current ratio of 1.67 — comfortably above the 1.0 solvency floor and the 2.0 level many banks prefer to see.

Working capital is not the same as cash on hand, because much of it is tied up in receivables and inventory that take time to convert. A business can show positive working capital and still face a cash crunch if its customers pay slowly or its inventory turns slowly. That is why managers watch two related metrics alongside it: the current ratio (current assets ÷ current liabilities) for a quick solvency check, and the cash-conversion cycle — the number of days from paying suppliers to collecting from customers — for the speed at which working capital actually cycles through the business.