Working Capital & Liquidity Ratio Calculator - Analyze Your Business Financial Health

What is Working Capital?

Definition and Importance
Key Components
Working Capital Cycle

Working capital is the difference between a company's current assets and current liabilities. It is a key indicator of a business's short-term financial health and operational efficiency.

Why Working Capital Matters

A positive working capital means a company can pay off its short-term liabilities with its short-term assets. Negative working capital may indicate liquidity problems.

Working Capital in Practice

A company with $50,000 in current assets and $30,000 in current liabilities has a working capital of $20,000.
If current liabilities exceed current assets, the business may struggle to meet its obligations.

Step-by-Step Guide to Using the Calculator

Input Your Data
Review the Results
Interpret the Ratios

Enter your company's current assets, current liabilities, and (optionally) inventory and cash. The calculator will instantly provide your working capital and liquidity ratios.

How to Use the Results

Compare your ratios to industry benchmarks to assess your business's financial health.

Calculator Usage Examples

Input: Current Assets = $60,000, Current Liabilities = $35,000. Output: Working Capital = $25,000.
Quick Ratio helps you see if you can pay short-term debts without selling inventory.

Real-World Applications of Working Capital Analysis

Business Management
Investment Decisions
Creditworthiness Assessment

Working capital analysis is crucial for business owners, investors, and lenders. It helps in making informed decisions about operations, investments, and lending.

Why Investors Care

Investors use liquidity ratios to evaluate a company's ability to meet short-term obligations and manage cash flow effectively.

Applications in Business

Banks may require a minimum current ratio before approving a loan.
Investors compare quick ratios across companies in the same industry.

Common Misconceptions and Correct Methods

Misinterpreting Ratios
Ignoring Industry Differences
Overlooking Inventory Impact

Not all high working capital is good; excess may mean inefficient use of resources. Ratios should be compared within the same industry for accuracy.

Inventory's Role

Inventory can inflate current assets. Quick ratio provides a more conservative view by excluding inventory.

Misconceptions in Practice

A retail business may have a high current ratio due to large inventory, but low quick ratio.
Comparing ratios across different industries can be misleading.

Mathematical Derivation and Examples

Formulas Explained
Sample Calculations
Interpreting Results

Working Capital = Current Assets - Current Liabilities. Current Ratio = Current Assets / Current Liabilities. Quick Ratio = (Current Assets - Inventory) / Current Liabilities.

Example Calculation

If a company has $80,000 in current assets, $50,000 in current liabilities, and $20,000 in inventory: Working Capital = $30,000; Current Ratio = 1.6; Quick Ratio = 1.2.

Mathematical Examples

Quick Ratio = (80,000 - 20,000) / 50,000 = 1.2
Current Ratio = 80,000 / 50,000 = 1.6

Retail Store Liquidity Analysis

Manufacturing Company Quick Ratio

Service Business with High Cash Reserve

Startup with No Inventory