Working Capital Formula (Table of Contents)
 Working Capital Formula
 Working Capital Calculator
 Working Capital Formula in Excel (With Excel Template)
Working Capital Formula
The excess of current assets over current liability is known as working capital. Liabilities and assets which are shortterm in nature are required in day to day business activities. When a business managers shortterm liability from shortterm assets, the procedure is known as a working capital cycle.
Here’s the Working Capital Formula –
From working capital, we can get away with an idea regarding the scenery of the business or in other words how effectively the particular business is going. So, it is a reflection of shortterm liquidity of the particular company and the degree of operational efficiency can we measure on the basis of a higher current asset over current liabilities.
Constituents of Current Assets
 Current investments
 Cash
 Inventories
 Trade receivables
 Bank balance
 Short term loans and advances
 Other current assets
Constituents of Current Liabilities
 Shortterm borrowings
 Trade payables
 Other current liabilities
 Shortterm provisions.
Example of Working capital Formula
The Balance Sheet of Tata Steel is presented as follows:
The balance sheet of Tata Steel 

Current Liabilities (INR in Cr.) 
Current Assets (INR in Cr.) 

Shortterm borrowings  669.88  Current investments  14640.37  
Trade payables  11242.75  Cash & bank  4696.74  
Other current liabilities  12959.43  Inventories  11023.41  
Shortterm provisions.  735.28  Trade receivables  1875.63  
Short term loans & Advances  74.13  
Other Current liabilities  2333.63  
25607.34  34643.91 
Working Capital of Tata steel at that point in time would be
 Working Capital= Current Assets – Current Liabilities
 Working Capital = INR (34643.9125607.34)
 Working Capital = INR 9036.57
Explanation of Working Capital Formula
 A working capital formula is extensively used in a business to meet shortterm financial obligations or shortterm liabilities.
 Positive net working capital is resultant when a company has enough current assets over its current dues. On the other hand, if the company is unable to produce positive working capital then the company have to take its excess liabilities such as higher shortterm borrowings, higher accounts payable etc.
 Another striking formula of each analyst inspect is the operating working capital which is accounts receivable class inventory minus accounts payable.
 Thus, in spite of looking at each and, every current asset one may have a look at the accounts receivable and inventory value along with the accounts payable. Thus, the financial health of the particular company can be fairly understood when it shows a positive value.
 Having a positive working capital, it indicates a healthy sign of shortterm financial health of the particular business as it has enough liquid assets after repairing its shortterm bills and internally the financial health of the particular company would help to grow its business and its assets.
 Without additional working capital a Company has to borrow additional funds from a bank loan or from a financial institution then it will hinder the working capital as the current borrowings will come under current liabilities and hence the net working capital will reduce.
 So, in other words, it can be integrated that business is not strong enough to meet its shortterm liabilities from its shortterm assets. Thus, there is always a requirement of shortterm borrowings from a third party and which can be interpreted as a negative sign for the business. Shortterm borrowings would lead to higher interest costs and it will affect profitability and margin. So, in most of the business which is capital intensive in nature does have a negative working capital or very low working capital and the profitability and the margin is very low compared to assets light businesses.
 Negative working capital suggests that the assets of the particular business are not effectively used and it may lead to a liquidity crisis.
 If a company has used fixed assets such as Land properties buildings longterm investments but there is a cash crunch because of higher shortterm liabilities, then also the company will face a liquidity crisis and hence it will force to take shortterm borrowings.
 A late payment to creditors will result in higher accounts payable and delay in the entire process will result in lower working capital and ultimately it will hinder corporate credit rating of the particular business.
Significance and Use of Working Capital Formula
Working capital is extensively used in analyzing different companies within the same sector.
An FMCG business would have relative Lee higher working capital compared to steel manufacturing business because of steel manufacturing request plants and machinery which are relatively costly than the manufacturing plants of FMCG. So, in spite of having higher assets the business would require borrowing from banks and other financial institutions and hence it will create higher interest costs.
4.5 (545 ratings)
Show the margin of steel plants business is generally lesser compared to an FMCG company.
From working capital, one can have a fair idea about the current assets and the current liabilities of a particular business.
If a business is generating enough cash flows then a part of that cash flow will be invested in current investments which are shortterm in nature and longterm investments which is for longterm investing purposes.
Shortterm investments can be utilized when there is a requirement of additional liquidity within the business due to a spike in current liabilities.
Cash and Bank balances generally don’t contain any interest receipt due to shortterm in nature. Trade receivables generally happen to be a certain portion of the Revenue. So higher trade receivable suggests there is a chance of bed date in future if the business scenario is not favored for the company. On the other hand, trade payables r generally, credit given by the supplier.
Working Capital Calculator
You can use the following Working Capital Calculator
Current Assets  
Current Liabilities  
Working Capital Formula  
Working Capital Formula =  Current Assets – Current Liabilities 
=  0 – 0 
=  0 
Working Capital Formula in Excel (With Excel Template)
Here we will do the same example of the Working Capital formula in Excel. It is very easy and simple. You need to provide the two inputs i.e Current Assets and Current Liabilities
You can easily calculate the Working Capital using Formula in the template provided.
We need to calculate Working Capital using Formula i.e Working Capital= Current Assets – Current Liabilities
You can download this Working Capital Template here – Working Capital Formula Excel Template
Conclusion:
A working capital formula determines the financial health of the business and it suggests how the profitability can be increased in future through the current ratio which we get by dividing current asset by current liabilities. The ideal ratio should be 2 is to 1 in the case of manufacturing companies. However, a capitalintensive company will have a different ratio and in case of negative working capital, the ratio might reverse in most of the cases. The day to day operations can be determined by the Working capital formula i.e the excess of Current Assets over Current Liabilities.
Recommended Articles
This has been a guide to a Working Capital formula. Here we discuss its uses along with practical examples. We also provide you with Working Capital Calculator with downloadable excel template. You may also look at the following articles to learn more –
 Money Market and Capital Market Top Differences
 Guide to Working Capital Projections
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 Guide to Gross Profit Margin Formula
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