Working Capital Formula
Calculating your working capital isn't as difficult as it seems. Working capital is calculated as the sum of inventory, receivables, and rebates less payables. Here's the formula you'll be using:
Working Capital = Inventory + Receivables + Rebate − Payables
Let us break it down:
Inventory: These are the items you currently have on hand that are ready to sell. Keeping track of your inventory allows you to avoid overstocking or understocking, both of which can affect your cash flow.
Receivables: This is the money your consumers owe you. Quick tip: faster collections equals better working capital!
Rebates: These are essentially discounts or refunds that can help increase your working capital.
Payables: These are short-term debts that you owe to suppliers. Keeping payables in check is essential to maintaining good cash flow.
How to Calculate Working Capital?
Let’s put this formula to work with a quick example. Imagine that you’re running an e-commerce business, and you want to know your current net working capital. Here’s what you’ve got:
- Inventory: $50,000
- Receivables: $30,000
- Rebate: $5,000
- Payables: $40,000
Now, input these numbers into the formula:
Working Capital = 50,000 + 30,000 + 5,000 − 40,000 = 45,000
Your working capital is $45,000. This means you have adequate assets to cover your short-term liabilities and keep your business running smoothly.
How to Use the Working Capital Calculator?
So you've understood the method, but what if you want a quick and simple way to calculate working capital? This is where our Working Capital Calculator comes in. Here's how to use it:
Enter Inventory Value: Start by adding up the total value of your existing inventory.
Enter Receivables: Enter the amount owed to you by your customers.
Enter Rebates: Include any rebates or discounts that your company has received.
Enter Payables: Finally, identify all of your short-term liabilities.
Click Calculate: Hit the calculate button. You will immediately see your net working capital.
What is a good working capital?
Thinking, what does a solid working capital ratio look like? Ideally, you should aim for a ratio between 1.2 and 2.0. This range indicates that for every dollar of liabilities, you have $1.20 to $2.00 in assets. Simply put, it indicates that your company is in a strong position to meet its short-term responsibilities.
If your ratio is less than one, it may be time to review your cash flow and search for strategies to increase your working capital. A very high ratio, on the other hand, could indicate that you aren't making the most use of your assets—perhaps you have too much inventory or surplus cash that should be spent on growth prospects.
