The Formula
Working capital is the money available to run your business day to day, and the formula is one line:
Working capital = current assets − current liabilities
Both inputs come straight off your balance sheet. Current assets are cash and everything expected to become cash within a year: bank balances, accounts receivable, inventory, prepaid expenses. Current liabilities are everything due within a year: accounts payable, credit card balances, accrued wages and taxes, and the next twelve months of payments on any debt.
A quick worked example. A business with $60,000 in cash, $45,000 in receivables, and $35,000 of inventory has current assets of $140,000. Against $50,000 of payables, $10,000 of accrued expenses, and $25,000 of loan payments due this year — $85,000 of current liabilities — its working capital is $140,000 − $85,000 = $55,000. That $55,000 is the cushion: what remains to operate and absorb surprises after every near-term obligation is met.
The Working Capital Ratio
The same two numbers expressed as a division give you the working capital ratio (also called the current ratio):
Working capital ratio = current assets ÷ current liabilities
The business above: $140,000 ÷ $85,000 = 1.65. The ratio is what makes businesses comparable — $55,000 of working capital means very different things to a food truck and a freight company, but a 1.65 ratio reads the same everywhere. The rough interpretation bands:
| Ratio | What it usually signals |
|---|---|
| Below 1.0 | Negative working capital — current obligations exceed current assets. A caution flag in most industries (with real exceptions, below). |
| 1.0 – 1.5 | Functional but thin. One slow quarter or one large surprise strains the cushion. |
| 1.5 – 2.0 | The healthy zone most lenders like to see. |
| Above 2.0 | Very liquid — sometimes conservatively strong, sometimes a sign cash is idling instead of working. |
Why "Good" Depends on the Business
The bands above bend by business model, and lenders know it:
- Fast-turn, cash-collecting businesses — restaurants, retail with quick inventory cycles — can run ratios near or below 1.0 in perfect health, because cash arrives daily while suppliers wait 30 days. Their model finances itself.
- Invoice-and-wait businesses — contractors, wholesalers, B2B services — need thicker cushions, because revenue sits in receivables for 30–90 days while payroll and materials bills arrive on schedule. This is the profile where thin working capital quietly strangles growth, and where invoice financing exists as a release valve.
- Seasonal businesses swing through the bands across the year by design — the meaningful check is the ratio at the low point of the cycle, not the average.
One more distinction worth knowing because lenders use it: net working capital usually refers to the same headline calculation, while some analysts strip cash and debt out to isolate operating working capital (receivables + inventory − payables) — a purer read on how much money the operating cycle itself consumes. If a lender quotes you a working capital figure that differs from yours, this definitional gap is usually why.
How Lenders Read Your Working Capital
Working capital is one of the first numbers an underwriter computes from your balance sheet, and it answers a specific question: can this business absorb a bad month and still make our payment?
- Banks and SBA lenders look at the ratio directly and want the cushion visible — a business at 0.9 asking for a loan reads as borrowing to stay afloat; the same business at 1.6 reads as borrowing to grow.
- Online lenders read the same story through your bank account: average daily balances and deposit consistency are working capital measured live rather than on a statement.
- All of them pair it with your debt-service coverage — working capital says whether you can survive the near term, DSCR says whether your cash flow carries the proposed payment. The two together are most of a credit decision.
The practical upshot: computing your own ratio before applying tells you which reception to expect, and cleaning it up — collecting receivables, trimming stale inventory, paying down short-term balances — is one of the few underwriting inputs you can genuinely improve in a quarter.
When a Working Capital Gap Is Worth Financing
Negative or thin working capital is a symptom with two very different causes, and the difference decides whether borrowing helps. A timing gap — profitable work whose cash arrives later than the bills it generates — is exactly what working capital financing exists for: the loan bridges to money that is genuinely coming. A profitability gap — costs structurally exceeding revenue — is not a financing problem, and borrowing against it only makes the reckoning larger. The honest test: if the gap recurs every month without a seasonal or growth explanation, fix the model before financing it. The product options for the first case are covered in what is working capital financing and working capital loan vs. line of credit.
Frequently Asked Questions
What is the working capital formula?
Working capital = current assets − current liabilities. Current assets are cash and anything converting to cash within a year (receivables, inventory); current liabilities are everything due within a year (payables, accrued expenses, the next twelve months of debt payments).
What is a good working capital ratio?
Roughly 1.5 to 2.0 for most businesses — enough cushion to absorb surprises without hoarding idle cash. Fast-turn cash businesses can healthily run lower; invoice-heavy businesses should aim higher. Below 1.0 deserves attention in any model.
Is negative working capital always bad?
No. Businesses that collect cash instantly and pay suppliers on terms — many restaurants and retailers — run negative working capital by design and in good health. It is a warning sign when it appears in a business that waits on receivables, or when it is new and trending worse.
What is the difference between working capital and cash flow?
Working capital is a snapshot from the balance sheet — what you hold versus what you owe, today. Cash flow is a movie — money moving in and out over a period. A business can show healthy working capital while burning cash, and vice versa; lenders read both.
How much working capital should I borrow?
Enough to cover the specific gap you can name — a season's inventory, the receivables float on a big contract — rather than a round number. Sizing the ask against your actual cycle is covered in how much can my business borrow.
Where iAdvance Now Fits
iAdvance Now is a small-business funding marketplace and broker. If the math above surfaced a genuine timing gap, one application with a soft credit pull — no impact on your credit score — matches your business against 80+ lending partners offering working capital products, from term loans to lines of credit, with funding commonly in 24 to 48 hours. Start an application and see what your numbers qualify you for.