WORKING CAPITAL FORMULA You can understand working capital very well if you are commerce professional. You might have studied it in your schools and also might have used in running your business. working capital formula represents the difference between a firm’s current assets and current liabilities. Current assets indicate the assets that a firm expects to turn into cash within one business cycle, whichever is less. The current assets include cash, cash and cash equivalents, accounts receivables, inventory, etc. Current liabilities are best paid with current assets like cash, cash equivalents, and marketable securities because these assets can be converted into cash much quicker than fixed assets. As we known about correct assets now, we can focus on current liabilities, these are the liabilities that a firm expects to pay within one business cycle, and whichever is less. Current liabilities include accounts payables, accrued liabilities, accrued income taxes, dividends payable, capital leases due within a year. When current assets exceed current liabilities, it shown that the firm has enough capital to work. The working capital ratio transforms the working capital calculation into a comparison between current assets and current liabilities. By knowing these you can easily calculate working capital. A good working capital is a sign of a healthy business. A healthy business should have a good capacity to pay off its current liabilities with current assets. The current ratio is current assets divided by current liabilities and provides insight into working capital health at a firm. The working capital ratio is calculated by dividing current assets by current liabilities. The reason this ratio is called the working capital ratio comes from the working capital calculation. The ratio should always be above 1 as it indicates that current assets exceed liabilities, and the higher the ratio, the better is it for your company.
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