What is working capital and how do you calculate it?

Working capital is the cash a business has available to cover its day-to-day operations. You calculate it as current assets minus current liabilities — what you own that converts to cash within a year, minus what you owe within a year. Positive working capital means you can cover short-term obligations; negative working capital signals a cash crunch. It's the single clearest gauge of short-term financial health.

The working capital formula

Working capital measures the short-term liquidity a business has to run operations. The formula is simple: Working Capital = Current Assets − Current Liabilities. Current assets are what converts to cash within a year (cash, accounts receivable, inventory); current liabilities are what's due within a year (accounts payable, short-term debt, accrued expenses). The result — often called net working capital — is the cushion between what you can quickly turn into cash and what you owe soon.

Worked example

A business has $180,000 in current assets ($40K cash + $90K receivables + $50K inventory) and $110,000 in current liabilities ($70K payables + $40K short-term debt). Working capital = $180,000 − $110,000 = $70,000. That $70K is the buffer available to fund operations and absorb timing gaps before more cash comes in.

Positive vs negative working capital

Positive working capital — current assets exceed current liabilities; the business can cover short-term obligations and has room to operate and grow
Negative working capital — liabilities exceed assets; a short-term cash crunch where bills may come due before cash arrives
Too much working capital can also signal idle cash or slow-moving inventory that could be put to better use

The working capital cycle

Working capital is dynamic — it moves through a cycle: cash buys inventory, inventory sells and becomes a receivable, and the receivable is collected back into cash. The longer that cycle, the more working capital you need to bridge the gap between paying suppliers and getting paid by customers. Seasonal and fast-growing businesses feel this most, because growth and seasonality stretch the gap.

When financing fills the gap

When the working capital cycle creates a temporary shortfall — payroll is due before receivables land, or inventory must be bought ahead of a busy season — working capital financing bridges it. A business line of credit is the most common fit for recurring gaps (draw and repay as needed); a short-term loan or revenue-based financing fits one-time or urgent needs. ClearValue Lending evaluates your file and routes it to the one lender partner whose terms fit.

Sources

The U.S. Small Business Administration identifies managing cash flow and working capital as core to running a small business, and lists lines of credit and loans among the tools to cover short-term needs. — SBA — Manage Your Finances
The Federal Reserve's Small Business Credit Survey reports that covering operating expenses and uneven cash flow are among the most common reasons small businesses seek financing. — Federal Reserve — Small Business Credit Survey
The CFPB advises businesses to compare the total cost of credit when choosing a financing product to cover working-capital needs. — CFPB — Consumer & Small Business Finance

Key takeaways

Working capital = current assets − current liabilities (a.k.a. net working capital).
Positive = able to cover short-term obligations; negative = a short-term cash crunch.
The cash → inventory → receivable → cash cycle drives how much working capital you need.
When the cycle creates a gap, a line of credit (recurring) or short-term loan (one-time) bridges it; ClearValue Lending routes your file to the fitting partner.