How to Calculate Working Capital

Working capital is the difference between total current assets and total current liabilities. Current assets are those assets that are expected to be consumed within a year, including cash, cash equivalents, short-term investments, accounts receivable, inventory, etc. Current liabilities are payable within one year of time and include accounts payable, accrued expenses, notes payable and the current portion of long term debt.

Learn how to calculate working capital with the following example:

Below are the extracts from James Ltd's balance sheet as at 31 December 2010:
Trade debtors $35,000
Trade creditors $20,000
Bank overdraft $10,000
Cash $80,000
Prepaid expenses $15,000
Accrued expenses $6,000
Proposed dividends $63,000
Opening stock $55,000
Closing stock $40,000
Calculate the working capital.

Solution:
Current Assets = Trade debtors + Cash + Prepaid expenses + Closing stock = 35,000 + 80,000 + 15,000 + 40,000 = $170,000
Current Liabilities = Trade creditors + Bank overdraft + Accrued expenses + Proposed dividends = 20,000 + 10,000 + 6,000 + 63,000 = $99,000

Working Capital = Current Assets - Current Liabilities = 170,000 - 99,000 = $71,000

* Next: Operating Profit Margin Ratio Analysis