How to Calculate Working Capital
When you deduct current liabilities (CL) from current assets (CA), you get working capital. The mathematical expression of the first sentence is the working capital formula, and it goes like this: WC = CA – CL. This calculation shows the short-term and liquid assets which remain once short-term liabilities have been paid off. It is also a measure of the short-term liquidity of a company and is important for doing financial modeling and analysis, and for managing cash flow.
Example Calculation Using the WC Formula
A business can increase its working capital (WC) by selling more products. If a product’s price per unit and cost per unit are $1000 and $600, respectively, then the working capital of its manufacturing company will grow by $400 for each unit, as either accounts receivable or cash will increase.
Comparing a company’s working capital against those of its rivals in the same segment can demonstrate the competitive position of the former. If Company X has $40,000 while Company Y has $15,000 and Z has $10,000, then the first of those three can spend more to expand the business more quickly than its rivals.
Although the above-mentioned example and formula are the most common definition of WC, there are admittedly others more fine-tuned.