What is working capital?

Why is working capital important? 

Working capital helps you understand the short-term financial health of your business. If you have positive working capital, it usually means you can fund current operations and invest in business growth. Plus, it can help you weather tough economic times.

On the other hand, negative working capital can make it difficult to pay staff, suppliers or creditors if you run into cash flow problems. You might also have trouble raising funds to grow your business.

Having too much working capital isn’t always a good thing. It could mean your business:

• Has too much inventory
• Isn’t investing enough cash
• Is missing out on low-interest borrowing opportunities
  
   

How to calculate working capital 

Working capital is calculated as your current assets minus your current liabilities. It can vary from day to day.

Calculate your working capital using this formula:
Working capital = current assets - current liabilities

Where:

• Current assets: Cash and other assets you can convert into cash within one year, like accounts receivable and inventory
• Current liabilities: Financial obligations that are due within one year, like wages, accounts payables and short-term loans

For example, if your business has $100,000 worth of current assets and $60,000 of current liabilities, it has $40,000 of working capital. You can find your current assets and current liabilities on your balance sheet.

Working capital ratio

Working capital can also be calculated as a ratio. Simply divide your current assets by your current liabilities.

Calculate working capital ratio using the formula:
Working capital ratio = current assets/current liabilities

If your working capital ratio is less than one, you might not have enough cash to cover upcoming expenses. A good working capital ratio is usually between 1.2 and 2.

Working Capital Solutions 

With extensive market experience and a deep knowledge of the Australian financial environment, we're a leading provider of tailored working capital solutions for a broad range of clients across many industries. We can help you:

• Enhance the efficiency of your day-to-day business operations
• Improve your overall cash flow
• Optimise working capital and finance growth

We’ll work with you to find a complete banking solution that suits your business needs.