How to use the working capital calculator
All the inputs come from the current sections of a balance sheet. Use figures from the same date.
- Current assets. Enter cash (include short-term investments you could sell within days), accounts receivable net of bad-debt allowances, inventory at cost, and other current assets such as prepaid expenses.
- Current liabilities. Enter accounts payable, short-term debt (credit lines plus the part of long-term loans due within 12 months), accrued expenses such as wages and taxes, and other current liabilities such as customer deposits.
- Annual revenue is optional. It expresses working capital as a share of sales, which makes companies of different sizes comparable.
The chart sets each asset against each liability.
The formulas
Current ratio = Current assets ÷ Current liabilities
Quick ratio = (Cash + Receivables) ÷ Current liabilities
Cash ratio = Cash ÷ Current liabilities
Working capital % of revenue = Working capital ÷ Annual revenueCurrent assets are expected to turn into cash, and current liabilities fall due, within one year. Cash here includes short-term investments. The quick ratio leaves out inventory and other current assets because they cannot always be turned into cash quickly at full value.
A worked example
Company A, a wholesaler, has $120,000 in cash, $210,000 owed by customers, $180,000 of inventory and $25,000 of prepaid expenses: $535,000 of current assets. It owes suppliers $145,000, has $60,000 drawn on a credit line, $70,000 of accrued wages and taxes and $15,000 of other short-term obligations: $290,000 in all.
Working capital is $245,000 and the current ratio is 1.84×. Leaving out inventory, the quick ratio is 1.14×, and cash alone covers 41% of current liabilities. On $1,800,000 of annual revenue, working capital equals 13.6% of sales, or about 50 days of revenue.
Reading the ratios
The bands below are rough and industry-dependent. They are a starting point for questions, not a verdict.
| Current ratio | Common reading |
|---|---|
| Below 1.0 | Current liabilities exceed current assets. A concern unless the business collects cash before it pays suppliers. |
| 1.0 to 1.2 | Thin cushion. A slow month of collections could squeeze cash. |
| 1.2 to 2.0 | A comfortable range for many businesses. |
| 2.0 to 3.0 | Strong liquidity. Worth checking whether stock or receivables are building up. |
| Above 3.0 | Often a sign of idle cash, slow-moving inventory or slow collections rather than extra safety. |
Read the quick ratio next. A quick ratio near 1.0 or above means cash and receivables alone could cover what is due within a year. A large gap between the current and quick ratios means much of the cushion is inventory, which only becomes cash when it sells, often at a discount in a hurry.
A higher ratio is not always better. Every dollar of working capital is a dollar not earning a return elsewhere, so a business that collects faster and holds less stock can be both leaner and safer.
Same working capital, different ratio
Working capital and the current ratio can move in different directions. Suppose Company A uses $50,000 of its cash to pay down the credit line. Both current assets and current liabilities fall by the same amount, so working capital stays at $245,000, but the current ratio rises to 2.02× while the cash ratio drops to 0.29×.
So a single ratio can be flattered by timing, for example by paying bills just before the balance sheet date.
When working capital is negative, as in a business with $170,000 of current assets against $200,000 of current liabilities, the current ratio falls to 0.85× and the quick ratio to 0.40×. Unless customers pay upfront, that company depends on new sales or borrowing to meet bills already on the books.
What this calculator does not include
The ratios are a snapshot of one day. They do not show how quickly receivables are collected or inventory sold; the cash conversion cycle calculator measures that. They take balance sheet values at face value, so overdue receivables or obsolete stock overstate liquidity. Unused credit lines, which can be a large source of short-term cash, do not appear at all. Seasonal businesses can look very different at different points of the year, so compare the same quarter across years.