# How to work out your working capital

Working capital is current assets minus current liabilities. It shows if you can pay short-term bills. Also work out operating working capital: receivables plus stock minus payables.

Free tool: [Working capital calculator](https://www.pulsify.tech/free-tools/working-capital-calculator/). Enter current assets and current liabilities to get working capital and the current ratio. The Quick Ratio tab strips out stock. The Cash Cycle tab adds DSO, DIO, DPO and the cash conversion cycle. Every cash cycle input is optional.

## Why it matters

Working capital tells you how much cash is tied up in running the business and whether you can meet bills coming due.

Growing businesses often run short even when profitable, because stock and debtors grow before cash arrives.

## The steps

1. **List current assets.** Cash, accounts receivable, stock and prepayments. These turn to cash within 12 months.
2. **List current liabilities.** Accounts payable, GST and PAYG owing, wages and super owing and loan repayments due in 12 months.
3. **Work out working capital.** Current assets minus current liabilities.
4. **Work out the current ratio.** Current assets divided by current liabilities. Above 1 means assets cover short-term debts.
5. **Work out operating working capital.** Receivables plus stock minus payables. It shows cash tied up in operations.
6. **Compare with sales.** Express operating working capital as days of sales. A rising number means more cash is tied up.
7. **Act on it.** Collect faster, hold less stock or negotiate longer terms to free cash.

## Worked example

Example Distribution Pty Ltd works out its working capital at 31 October.

| Item | Amount |
| --- | --- |
| Cash | A$51,400 |
| Accounts receivable | A$22,000 |
| Stock | A$80,000 |
| Current assets | A$153,400 |
| Accounts payable | A$10,260 |
| GST owing | A$24,090 |
| Wages and super owing | A$9,650 |
| Current liabilities | A$44,000 |
| Working capital | 153,400 - 44,000 = A$109,400 |
| Current ratio | 153,400 / 44,000 = 3.49 |
| Operating working capital | 22,000 + 80,000 - 10,260 = A$91,740 |

The business can cover its short-term debts 3.5 times. Most of the working capital is A$80,000 of stock, so the focus is stock turnover.

## Common mistakes

- Counting slow-moving stock as cash.
- Leaving out GST and super owing.
- Looking at the ratio without looking at the mix.
- Ignoring the due dates of loans.

## Common questions

### What is a good current ratio?

Above 1 means current assets cover current liabilities. A good level depends on your industry.

### Is more working capital better?

Not always. A very high number can mean idle cash or too much stock.

### How is it linked to DPO and DSO?

Slower customer payments and faster supplier payments tie up more working capital.

## Next step

Use the [Working capital calculator](https://www.pulsify.tech/free-tools/working-capital-calculator/) first. Then see [Pulsify for finance leaders](https://www.pulsify.tech/solutions/cfo/).

Source: https://www.pulsify.tech/how-to/work-out-your-working-capital/ (last checked 2026-10-21)