Working capital, also known as net working capital, is the amount of available capital that a company has on hand to pay for its short-term expenses. This form of capital allows companies to operate by covering the costs of inventory, short-term debt, and day-to-day operations. Working capital is the difference between the company’s current [assets](https://www.masterclass.com/articles/what-is-an-asset)—any resource or goods used to generate cash flow—and current [liabilities](https://www.masterclass.com/articles/liabilities-in-business-explained), which refers to any short-term financial obligations. Thus, a company with enough assets to cover its short-term debts has positive working capital. Conversely, a company has a working capital deficit or negative working capital if its liabilities are greater than its assets.

The amount of working capital business owners need to continue operating varies from company to company. Some businesses, like retail, need more working capital on hand to cover the ebb and flow of busy and slow seasons. Others, like tech companies with less physical inventory, have lower operating expenses and, thus, require less working capital.
Working capital has two components: current assets and current liabilities. Both of these can be found on a company’s [balance sheet](https://www.masterclass.com/articles/what-is-a-balance-sheet), one of the financial statements a business must complete each year. Here is a breakdown of these components:

- __Current assets__: Current assets are any resources or goods that a firm can use to generate cash flow within one fiscal year. Examples of current assets include cash on hand, cash equivalents, [accounts receivable](https://www.masterclass.com/articles/accounts-receivable-explained), stock inventory, marketable [securities](https://www.masterclass.com/articles/what-are-securities), prepaid liabilities, and other liquid assets. Current assets are distinct from long-term fixed assets, which are assets that a firm cannot easily convert into cash within a one-year period. Fixed or long-term assets include [intellectual property](https://www.masterclass.com/articles/intellectual-property-guide), real estate, natural resources, and equipment. 
- __Current liabilities__: Current liabilities are a firm’s short-term financial obligations due within one fiscal year. Examples of current liabilities include wages, accounts payable, rent, utilities, short-term loan repayment, and income taxes. Long-term liabilities are debts due over a period longer than one year, such as mortgage loans, investor [bonds](https://www.masterclass.com/articles/bonds-vs-stocks-explained), or loan deferments.
Working capital is important because companies need a certain amount of liquidity to pay for their daily operations. Good working capital management ensures large and small business owners alike will cover their short-term, day-to-day expenses while continuing to grow the business. 

Investors and lenders use the working capital ratio, a metric that measures a firm’s short-term financial health, to determine whether or not to invest or lend funds. Maintaining a positive working capital ratio means the business can cover its expenses, making investors more likely to invest and lenders to extend a line of credit.
Businesses use a simple formula to calculate their current working capital ratio, also called the current ratio. To calculate the current working capital ratio, take the sum of the current assets, including cash, accounts receivable, and inventory, and divide it by the sum of the current short-term liabilities, including accounts payable, wages, taxes payable, and the amount due on debts in the near future. 

For example, the combined value of a retail store’s current assets, including its real estate, inventory, and cash, totals $200,000. On the other hand, its wages, rent, utilities, and taxes total a combined current liabilities of $125,000. Therefore, its working capital calculation—$200,000 divided by $125,000—is 1.6. With a ratio greater than one, this retail store can pay off its short-term debts and obligations. 

Businesses generally strive to maintain a positive working capital ratio, which means they can cover all of their short-term expenses. The ideal ratio, however, is a sweet spot between being too high and too low. Too high of a number may indicate the business isn’t investing its extra assets effectively. Too low of a number, on the other hand, often means a firm may have trouble meeting their immediate expense.
Get the [MasterClass Annual Membership](https://www.masterclass.com) for exclusive access to video lessons taught by business luminaries, including Howard Schultz, Chris Voss, Robin Roberts, Sara Blakely, Daniel Pink, Bob Iger, Anna Wintour, and more.
A company’s working capital ratio is an important metric that helps analysts determine its short-term financial health.

A company’s working capital ratio is an important metric that helps analysts determine its short-term financial health.

What Is Working Capital? How to Calculate Working Capital

Working capital, also known as net working capital, is the amount of available capital that a company has on hand to pay for its short-term expenses. This form of capital allows companies to operate by covering the costs of inventory, short-term debt, and day-to-day operations. Working capital is the difference between the company’s current <a href='https://www.masterclass.com/articles/what-is-an-asset' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/what-is-an-asset","linkCopy":"assets","category":null}'>assets</a>—any resource or goods used to generate cash flow—and current <a href='https://www.masterclass.com/articles/liabilities-in-business-explained' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/liabilities-in-business-explained","linkCopy":"liabilities","category":null}'>liabilities</a>, which refers to any short-term financial obligations. Thus, a company with enough assets to cover its short-term debts has positive working capital. Conversely, a company has a working capital deficit or negative working capital if its liabilities are greater than its assets.The amount of working capital business owners need to continue operating varies from company to company. Some businesses, like retail, need more working capital on hand to cover the ebb and flow of busy and slow seasons. Others, like tech companies with less physical inventory, have lower operating expenses and, thus, require less working capital.

What Is Working Capital?

Working capital has two components: current assets and current liabilities. Both of these can be found on a company’s <a href='https://www.masterclass.com/articles/what-is-a-balance-sheet' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/what-is-a-balance-sheet","linkCopy":"balance sheet","category":null}'>balance sheet</a>, one of the financial statements a business must complete each year. Here is a breakdown of these components:<ul class="mc-m-4 list-styled"><li class="">Current assets: Current assets are any resources or goods that a firm can use to generate cash flow within one fiscal year. Examples of current assets include cash on hand, cash equivalents, <a href='https://www.masterclass.com/articles/accounts-receivable-explained' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/accounts-receivable-explained","linkCopy":"accounts receivable","category":null}'>accounts receivable</a>, stock inventory, marketable <a href='https://www.masterclass.com/articles/what-are-securities' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/what-are-securities","linkCopy":"securities","category":null}'>securities</a>, prepaid liabilities, and other liquid assets. Current assets are distinct from long-term fixed assets, which are assets that a firm cannot easily convert into cash within a one-year period. Fixed or long-term assets include <a href='https://www.masterclass.com/articles/intellectual-property-guide' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/intellectual-property-guide","linkCopy":"intellectual property","category":null}'>intellectual property</a>, real estate, natural resources, and equipment. </li><li class="">Current liabilities: Current liabilities are a firm’s short-term financial obligations due within one fiscal year. Examples of current liabilities include wages, accounts payable, rent, utilities, short-term loan repayment, and income taxes. Long-term liabilities are debts due over a period longer than one year, such as mortgage loans, investor <a href='https://www.masterclass.com/articles/bonds-vs-stocks-explained' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/bonds-vs-stocks-explained","linkCopy":"bonds","category":null}'>bonds</a>, or loan deferments. </li></ul>

What Are the Main Components of Working Capital?

Working capital is important because companies need a certain amount of liquidity to pay for their daily operations. Good working capital management ensures large and small business owners alike will cover their short-term, day-to-day expenses while continuing to grow the business. Investors and lenders use the working capital ratio, a metric that measures a firm’s short-term financial health, to determine whether or not to invest or lend funds. Maintaining a positive working capital ratio means the business can cover its expenses, making investors more likely to invest and lenders to extend a line of credit.

Why Is Working Capital Important?

Businesses use a simple formula to calculate their current working capital ratio, also called the current ratio. To calculate the current working capital ratio, take the sum of the current assets, including cash, accounts receivable, and inventory, and divide it by the sum of the current short-term liabilities, including accounts payable, wages, taxes payable, and the amount due on debts in the near future. For example, the combined value of a retail store’s current assets, including its real estate, inventory, and cash, totals $200,000. On the other hand, its wages, rent, utilities, and taxes total a combined current liabilities of $125,000. Therefore, its working capital calculation—$200,000 divided by $125,000—is 1.6. With a ratio greater than one, this retail store can pay off its short-term debts and obligations. Businesses generally strive to maintain a positive working capital ratio, which means they can cover all of their short-term expenses. The ideal ratio, however, is a sweet spot between being too high and too low. Too high of a number may indicate the business isn’t investing its extra assets effectively. Too low of a number, on the other hand, often means a firm may have trouble meeting their immediate expense.

How to Calculate Working Capital

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A company’s working capital ratio is an important metric that helps analysts determine its short-term financial health.

A company’s working capital ratio is an important metric that helps analysts determine its short-term financial health.
