Quick reference
What working capital measures
Working capital represents the net liquid resources available for operations. Current assets are assets expected to be converted to cash within 12 months: cash itself, accounts receivable (money owed by customers), inventory, and prepaid expenses. Current liabilities are obligations due within 12 months: accounts payable (money owed to suppliers), short-term loans, accrued expenses, and deferred revenue.
Working capital management focuses on three core components. Receivables management — how quickly customers pay. A business that invoices on 30-day terms but collects in 60 days effectively funds its customers for 30 days. Inventory management — how much stock is held and how long before it sells. Excess inventory ties up cash. Payables management — how long the business takes to pay its own suppliers. Extending payment terms to 60 or 90 days frees up cash.
The current ratio (current assets divided by current liabilities) is the most common liquidity metric derived from working capital. A ratio above 1,0 means current assets exceed current liabilities. Above 1,5 is generally considered healthy. Below 1,0 means the company cannot cover all short-term obligations with short-term assets — a warning sign, though not necessarily a crisis if there are committed credit facilities available.
Working capital requirements vary significantly by industry. Manufacturing businesses hold large inventory and have long production cycles, requiring substantial working capital. Supermarkets turn inventory rapidly, often receive cash before paying suppliers, and can operate with negative working capital. Software businesses with subscription revenue and minimal inventory typically need very little working capital.
Working capital formula
The cash conversion cycle
The cash conversion cycle (CCC) measures how long it takes a business to convert its investments in inventory and other resources into cash flows from sales. A shorter cycle means cash returns faster to fund the next cycle. A longer cycle means more working capital is tied up at any given time.
CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) - Days Payable Outstanding (DPO).
DIO is the average number of days to sell inventory. DSO is the average number of days to collect payment after a sale. DPO is the average number of days taken to pay suppliers.
Example: a manufacturer holds inventory for 45 days, collects from customers in 50 days, and pays suppliers in 30 days. CCC = 45 + 50 - 30 = 65 days. This means the business funds 65 days of operations from its own working capital before the cash cycle completes. Reducing DIO by 10 days, improving collections to 40 days, and extending payables to 45 days would reduce CCC to 40 days — a 38% reduction in working capital requirements.
Amazon famously operates with a negative CCC — customers pay instantly on purchase, suppliers are paid on 60+ day terms, and inventory turns rapidly. This allows Amazon to use suppliers' money to fund growth rather than its own capital.
Worked examples
Working capital: 470.000 - 275.000 = 195.000. Current ratio: 470.000 / 275.000 = 1,71. This business has 195.000 more in current assets than current liabilities — a comfortable liquidity position. The ratio of 1,71 is above the 1,5 benchmark. However, 220.000 of the current assets are inventory, which takes time to sell and convert to cash. The quick ratio (excluding inventory): (470.000 - 220.000) / 275.000 = 0,91 — below 1,0, indicating the liquid position is tighter than the headline working capital suggests.
DIO: (Inventory / COGS) x 365 = (360.000 / 1.440.000) x 365 = 91 days. DSO: (Receivables / Revenue) x 365 = (280.000 / 2.400.000) x 365 = 43 days. DPO: (Payables / COGS) x 365 = (180.000 / 1.440.000) x 365 = 46 days. CCC: 91 + 43 - 46 = 88 days. This business funds 88 days of operations. Reducing inventory by 90.000 would cut DIO by 23 days, reducing the CCC to 65 days and freeing 90.000 in cash.
Working Capital Calculator
Enter your current assets and liabilities to calculate working capital, current ratio and quick ratio.
Current ratio benchmarks by industry
| Industry | Typical Current Ratio | Notes |
|---|---|---|
| Manufacturing | 1,5 to 2,5 | Large inventory and receivables requirements |
| Retail | 0,5 to 1,5 | Fast inventory turnover, often negative WC |
| Construction | 1,0 to 2,0 | Project-based — variable timing |
| Software/SaaS | 1,5 to 4,0 | Low inventory, high cash from subscriptions |
| Healthcare | 1,5 to 2,5 | Slow receivables from insurers |
| Supermarkets | 0,3 to 0,8 | Negative WC common — pay suppliers after receiving cash |
Common mistakes with working capital
Methodology
Working capital calculated as current assets minus current liabilities. Current ratio calculated as current assets divided by current liabilities. Quick ratio calculated as (current assets minus inventory) divided by current liabilities. Cash conversion cycle: DIO = (inventory / COGS) x 365; DSO = (receivables / revenue) x 365; DPO = (payables / COGS) x 365; CCC = DIO + DSO - DPO.
Current ratio and working capital benchmarks vary significantly by industry. A ratio considered low in manufacturing may be normal or even efficient in retail. Always compare working capital metrics to industry peers rather than applying universal targets.
Calculate your working capital
Enter your current assets and liabilities to calculate working capital, current ratio and quick ratio.
Frequently asked questions
Formula based on standard mathematical and financial methods. Results are for informational purposes. Last reviewed May 2026. Version 1.