Working capital is the lifeblood of any business — it is the difference between current assets (cash, receivables, inventory) and current liabilities (payables, short-term debt). A business can be profitable yet fail due to poor working capital management. This calculator provides a complete liquidity picture including the current ratio, quick ratio, and receivable days — the key metrics banks and investors use to assess a business's short-term financial health.
Working Capital Ratios — What They Mean
Current Ratio = Current Assets / Current Liabilities. A ratio of ≥ 1.5 is generally healthy; below 1.0 means current liabilities exceed current assets (immediate liquidity risk). Quick Ratio (Acid Test) = (Current Assets − Inventory) / Current Liabilities. Removes inventory because it is not immediately liquid. A quick ratio of ≥ 1.0 is the minimum safe threshold. Many lenders require a minimum current ratio of 1.33 for working capital loan approval.
Working Capital Cycle
The working capital cycle = Inventory Days + Receivable Days − Payable Days. A shorter cycle means faster conversion of inventory to cash, reducing the financing needed. For example, if you hold inventory for 30 days, collect from customers in 45 days, and pay suppliers in 30 days: working capital cycle = 30 + 45 − 30 = 45 days. Every day saved in the cycle reduces the working capital needed.
Frequently Asked Questions
What is a negative working capital?
Negative working capital (current liabilities > current assets) is dangerous for most businesses as it indicates potential inability to meet short-term obligations. However, some business models (supermarkets, e-commerce) deliberately run negative working capital — they collect cash from customers before paying suppliers, using customer payments as float.
How do banks calculate working capital loans?
Banks typically use the Nayak Committee method: Working Capital Loan = 20% of projected annual turnover. They also assess the working capital gap = Total current assets − Current liabilities (excluding bank borrowings) − 25% of current assets (margin the business must fund). The remaining gap is the eligible bank credit.
What is the difference between working capital and current assets?
Current assets include all assets expected to be converted to cash within 12 months: cash, bank balances, receivables, inventory, and prepaid expenses. Working capital = Current Assets − Current Liabilities. It is the net short-term financial position, not the gross assets.