Financial metrics glossary

Working capital: definition, formula and example

Working capital is the difference between a company's current assets and its current liabilities. It measures the cash, receivables and other assets that turn into cash within a year that are left after covering the obligations due within a year.

Updated October 7, 2026

Formula

Working capital = Current assets − Current liabilities
Current assets: cash, receivables, inventory, prepaid expenses
Current liabilities: payables, accrued expenses, deferred revenue, debt due within a year

Worked example

Sample

SAMPLE · Northbridge Analytics, September 2026

Northbridge Analytics, the fictional software company in the Financial Analyst's public sample, at the end of September 2026. Cash, receivables and payables are the figures its report prints; the other lines come from the balance sheet of the same books:

Balance sheet line	Month end
Operating Bank	$1,454,443.68
Stripe Clearing	$8,053.27
Accounts Receivable	$194,800.00
Prepaid Expenses	$8,100.00
Total current assets	$1,665,396.95
Accounts Payable	$46,465.97
Accrued Payroll	$73,756.67
Accrued Commissions	$2,724.00
Deferred Revenue	$115,750.00
Total current liabilities	$238,696.64

Working capital = $1,665,396.95 − $238,696.64 = $1,426,700.31
Operating working capital = receivables $194,800.00 − payables $46,465.97 = $148,334.03

Working capital: $1,426,700

Cash is 87.3% of current assets. Deferred revenue of $115,750 is subscriptions customers have paid for and not yet received — an obligation to deliver, not a bill to pay.

How to read it

Positive working capital means current assets exceed what falls due within a year. Negative working capital is a warning for most businesses, but a company paid in advance can carry it without strain: deferred revenue is an obligation to deliver, not to pay.
The make-up matters as much as the total. Cash is available today; receivables only when customers pay; inventory only when it is sold. Read working capital next to the receivables aging and DSO.
A change in working capital is a cash flow. When receivables or inventory grow faster than payables, the business ties up cash even while it is profitable — which is how growing companies run short of cash.
Operating working capital — receivables plus inventory minus payables — leaves out cash and debt and isolates the cash tied up in the trading cycle.

Original research: Financial benchmarks for small US public companies, by industry →

Where it shows up in the monthly management report

The report's “Cash and working capital” page shows cash, receivables and payables, with days sales outstanding, days payable outstanding and the working-capital timing gap — DSO minus DPO, in days.

It also lists the customers and suppliers with the largest balances, each with its share of receivables or payables.

Open the sample workspace — a fictional company's books, worked by the Financial Analyst, with its monthly report. No signup.
The Financial Analyst — what it reads from your accounting system, what the report contains and what it costs.

Current ratio
Current assets divided by current liabilities, as a ratio.
Quick ratio
Cash and receivables divided by current liabilities.
Days sales outstanding (DSO)
The average number of days customers take to pay their invoices.
Cash conversion cycle (CCC)
Days from paying suppliers to collecting from customers: DSO + DIO − DPO.
Operating cash flow
The cash a business's day-to-day operations bring in or use up.
Accounts receivable aging
Unpaid customer invoices grouped by how many days they are past due.

Frequently asked questions

How much working capital does a business need?

There is no single right figure. It depends on how quickly the business collects from customers, how long it holds stock and how long it takes to pay suppliers. Compare it with your own history and with what falls due over the next few months.

Can working capital be negative?

Yes, when current liabilities exceed current assets. For most businesses that means bills fall due faster than cash comes in; for a business paid in advance, a large deferred-revenue balance can make it negative without signalling a problem.

What is the difference between working capital and the current ratio?

Working capital is the difference between current assets and current liabilities, in dollars. The current ratio divides one by the other, which makes companies of different sizes comparable.

Why does working capital affect cash flow?

Money tied up in receivables, inventory and prepaid expenses is not in the bank. When those balances grow faster than payables and other current liabilities, operating cash flow falls below profit.