How To Calculate Working Capital?

Working capital is often described as the ‘Lifeblood of an organisation’. It is because maintaining uninterrupted business operations rely heavily on working capital. This further makes it imperative for companies to ensure that there is an adequate volume of working capital present at all times. For this, it is suggested that business owners should conduct a quick working capital calculation to understand their immediate requirements better.

Working Capital Calculation:

In simple words, working capital refers to the amount that is available at a firm’s disposal and can be readily used to meet day-to-day operational requirements. Essentially, working capital is the difference between an organisation’s current assets and current liabilities.

Generally, it serves as a measure of a firm’s -

  • Liquidity
  • Operational efficiency
  • Current financial health 

Insufficient working capital tends to interrupt the flow of operation and hampers the business’ overall profitability. This is why firms should always maintain a healthy in-flow of working capital to keep their operations uninterrupted. 

Also, a firm with adequate working capital projects a profitable image in the investment market. To maintain the same, individuals should make it a point to find out how to calculate working capital requirements and replenish the gap, as and when required. 

There are several ways to boost one’s working capital, including opting for invoice discounting services. In this regard, with KredX, you can utilise your unpaid invoices to get quick access to working capital within 24 - 72 hours*.

How To Compute Working Capital?

The working capital calculation is based on this accounting formula -

Working capital = Current Assets - Current Liabilities 

Here, current assets comprise those investments which can be converted into cash or cash equivalents in a year. For example -

  • Cash
  • Cash equivalents
  • Short-term deposits
  • Accounts receivable
  • Marketable securities

Whereas, current liabilities are those obligations that a firm has to pay off in a year. Examples of such liabilities include -

  • Income taxes
  • Accounts payable
  • Dividends declared
  • Outstanding wages

Other than this, there are two alternative formulas.

  • Working Capital Calculation Excluding Cash

Working capital = Current assets - Cash - Current Liabilities

  • Working Capital Calculation By Only Factoring In Core Accounts 

Working capital = Accounts receivables - Inventory - Accounts payable

Individuals can use a working capital calculator and analyse a firm’s current financial standing and proficiency in using available resources instantly. Such a financial instrument is available online and can be used anytime and anywhere. 

Example Of Working Capital Calculation:

This table is an excerpt of a company’s balance sheet as on 30 March 2020; with the available information compute the working capital of this company -

Particulars 

Amount (Rs.)

Assets 

 
  • Total Current Assets

7,58,01,100

  • Total Non-current Assets

8,57,46,600

Total assets 

16,15,47,700

Liabilities 

 
  • Total Current Liabilities 

4,38,03,800

  • Total Non-Current Liabilities 

1,24,07,000

Total Liabilities 

5,62,10,800

So, as per formula 

Working capital =Current Assets - Current Liabilities 

= 7,58,01,100 - 4,38,03,800

= 3,19,97,300

A positive value indicates that the firm has enough working capital to keep its operations afloat after paying off its immediate liabilities.

Analysis Of Working Capital: 

Typically, a positive working capital indicates that a firm has sufficient liquid assets to pay off immediate financial obligations and to reinvest in business operations. In turn, it reflects the financial standing of the firm positively.

On the other hand, a negative working capital indicates that the firm’s assets are not being used optimally and will eventually lead to a liquidity crisis. It may also signify that a firm has a lot of money tied up in fixed assets and does not have liquid assets to meet immediate working capital needs.

Regardless, financial analysts consider working capital ratio to be a more efficient way of measuring a firm’s current financial standing and liquidity. Typically, working capital is the difference between a company’s total current assets and current liabilities; whereas, working capital ratio serves as a financial measurement of liquidity. It is obtained by dividing the current assets of a firm by its current liabilities.

Usually, a higher ratio indicates favourable liquidity and a greater ability to pay off immediate debts. On the other hand, a low ratio indicates financial instability or lack of funds to meet financial obligations. 

In such a situation, a firm may consider raising funds via invoice discounting and generate capital to meet the working capital gap. 

At KredX, we extend instant funds at lucrative rates and exceptional terms of services. All you need to do is upload your unpaid invoices on our portal and gain immediate access to substantial funding to fill the working capital gap. 

By discounting unpaid invoices, business owners can meet the working capital gap easily and without much delay. Reach out to us now and avail integrated cash flow solutions instantly.

FAQs on Working Capital Calculation:

A. Net working capital is also known as working capital. It is essentially the difference between a firm’s current assets and current liabilities and helps to ascertain its financial standing at any given time.