What is working capital for a small business?

Working capital is the money a small business has available to fund day-to-day operations, calculated as current assets minus current liabilities. It shows whether the business can cover the obligations due within the next year using the cash and near-cash it holds.

How do you calculate working capital?

Subtract current liabilities from current assets. Current assets include cash, accounts receivable, and inventory; current liabilities include accounts payable, the current portion of loans, credit-card balances, and taxes due. If current assets are $120,000 and current liabilities are $80,000, working capital is $40,000.

What is business operating capital?

Business operating capital is another term for the funds a business uses to keep running day to day. It is generally used interchangeably with working capital — current assets minus current liabilities — for a small business.

How much working capital does a small business need?

Enough to cover the gap between paying for materials or labor and collecting from customers. A current ratio of roughly 1.5 to 2.0 gives most small businesses a comfortable cushion. The longer your collection times and the more inventory you hold, the more working capital you need.

Finance

Working Capital for Small Business: What It Is and How to Calculate It

A business can be profitable and still be squeezed when too much money is tied up in unpaid invoices and inventory. Working capital is the number that catches that squeeze early — here's how to calculate and read it.

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