Working Capital: What It Is and Formula to Calculate

Working capital is a powerful indicator of the success of your business, and it can give you borrowing power.
Teddy Nykiel
By Teddy Nykiel 
Updated
Edited by Ryan Lane

Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.

MORE LIKE THISSmall Business

What is working capital?

Working capital is the difference between a business's current assets and liabilities. Assets can include cash, accounts receivable or other items that will become cash within the next 12 months, while liabilities include expenses like payroll, accounts payable and debt payments due in the next 12 months.

If you're facing a temporary shortfall, getting a working capital loan is one way to give your business a quick infusion of cash. But this type of financing doesn't make sense if you need to finance a long-term investment, like an expansion. Consider other small-business loans for that type of capital.

FEATURED

 
QuickBooks
QuickBooks

QuickBooks Online

NerdWallet Rating 
5.0
Annual Fee 

$0

Why working capital is important

Working capital is an important indicator of a business’s financial health because it measures what small businesses have on hand to cover day-to-day expenses. Working capital acts as a cushion and offers opportunities for growth.

Working capital has two other important characteristics:

  1. It gives businesses borrowing power. Lenders and other creditors look at working capital as a measure of a company’s overall health and a business’s ability to take on new debt.

  2. It can fluctuate. Even successful businesses struggle with maintaining enough working capital, especially seasonal businesses and companies with large volumes of accounts receivable. Analyzing your business’s financials regularly, including the balance sheet and profit and loss statement, can help you plan to meet potential shortfalls.

How do you calculate working capital?

The working capital formula is:

Current assets – current liabilities = working capital

You can find accounting software that automatically tracks working capital for you.


Read quick overviews of these other important accounting concepts:


Best Accounting Software for Small Businesses
ProductStarting atPromotionLearn more
QuickBooks

QuickBooks Online

NerdWallet Rating 
5.0
Learn more

on QuickBooks' website

$30/month 

Additional pricing tiers (per month): $60, $90, $200.

50% off 

for first three months or free 30-day trial.

Learn more

on QuickBooks' website

Xero

Xero

NerdWallet Rating 
5.0
Learn more

on Xero's website

$15/month 

Additional pricing tiers (per month): $42, $78.

30-day free trial 

or monthly discount (terms vary).

Learn more

on Xero's website

Zoho Books

Zoho Books

NerdWallet Rating 
4.5
Learn more

on Zoho Books' website

$0 

Additional pricing tiers (per month): $20, $50, $70, $150, $275.

14-day free trial 

of the Premium plan.

Learn more

on Zoho Books' website

FreshBooks

FreshBooks

NerdWallet Rating 
4.5
Learn more

on FreshBooks' website

$19/month 

Additional pricing tiers (per month): $33, $60, custom.

30-day free trial 

or monthly discount (terms vary).

Learn more

on FreshBooks' website