Working capital equation

The 24/25 PWC Working Capital Study discovered that since 2019, there’s been a 9.1 day rise in Net Working Capital and currently, there is an excess of 1.56 trillion euros in working capital available.

That’s what the overall working capital landscape looks like but what about on an individual level? How do you calculate your company’s working capital?

What is the equation for working capital?

The equation for calculating working capital is this:

Current assets – current liabilities = working capital.

Let’s break that down.

Your company’s current assets are everything you own (think: inventory, cash, invoices) that you intend to sell or use within the next twelve-month period.

Your company’s current liabilities are any debts you owe that you have to pay within the next year. This could be invoices raised that you haven’t gotten around to paying yet, or any rent due.

You simply add up everything you own that you intend to leverage within the next year, and subtract everything you need to pay within the next year, to get your working capital.

Why should I calculate working capital?

Calculating working capital matters for a few key reasons. For starters, understanding working capital enables businesses to meet their financial obligations by ensuring there is enough cash in the business to pay any outgoings on time. This is particularly important if you often work with suppliers, as late payments can result in a reduced service, which can ultimately impact your end users.

Secondly, working capital goes side-by-side with healthy inventory levels. Understanding how much inventory you have and how much more you may need can help when ensuring you meet customer demands while avoiding surplus stock.

Thirdly, calculating working capital can help you spot opportunities and avoid disasters. If you have a lot of working capital, that could mean now is a good time to invest and grow. If you have very little (or worse, negative working capital), it could signal that now is a time to work hard on upselling and cross selling.

Working capital equation examples

Bob runs a small mechanic. He specialises in buying and fixing up old bikes, which he sells on for a profit. To keep his shop profits in the green and his customers happy, Bob needs to make sure he’s got enough stock to serve his growing customer base while not buying too much, so that he still has enough cash to pay his shop rent.

To calculate his working capital, he starts with his current assets.

Cash in the till: £100

Money owed for repairs: £200

Bikes ready to sell: £500

His total current assets amount to £800.

Then, he calculates his current liabilities.  

POs raised by suppliers that he hasn’t yet paid: £400

Rent owed: £300

This makes his current liabilities £700.

He subtracts his liabilities from his assets, getting a working capital total of £100.

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Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

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