BusCalcTools

Working Capital Calculator — Liquidity & Bank Readiness

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Calculate your working capital and current ratio — the two numbers a bank checks first when assessing your short-term financial health.

Working capital equals current assets minus current liabilities. The current ratio is assets divided by liabilities. Most banks require at least one point five.

How it works

Working capital is current assets minus current liabilities — the cash cushion a business has after settling everything due in the next 12 months. The current ratio expresses the same idea as a multiple: assets divided by liabilities. A ratio of 2.0 means assets are twice liabilities; 1.0 means they exactly cover; below 1.0 means the business cannot pay its short-term bills from short-term assets.

Most commercial lenders treat a current ratio of 1.5 as the floor for a working-capital line — below that and the file usually needs a personal guarantee or collateral. Above 3.0 the ratio starts telling a different story: the business is sitting on idle cash or slow-moving inventory that could earn more deployed elsewhere.

Common mistakes

  • Counting all inventory at full value— slow-moving stock, seasonal lines past their season, and damaged goods aren't fully realisable. Banks discount inventory at 40-60% of book value when stress-testing the current ratio. A balance sheet showing a 1.8 ratio can drop to 1.2 once stale inventory is written down.
  • Treating long-term debt instalments as long-term — the portion of a five-year loan due within 12 months is a current liability, not a long-term one. Many small-business balance sheets understate current liabilities by missing this, inflating the ratio by 20-30%.
  • Ignoring receivable quality— £100k of receivables from one large customer 60 days overdue is not the same as £100k spread across 20 customers averaging 30 days. The current ratio treats them identically; bankers and acquirers won't. Use the DSO calculator alongside this one for the full picture.

When to use this calculator

Use this before applying for a bank line, before a sale of the business, or as a quarterly self-check. The current ratio is the single most common metric a lender or buyer asks for, after revenue and profit. Knowing yours before they do means you can fix it before being asked.

For a 12-month forecast of how working capital will move with planned investments or sales growth, use the Cash Flow Calculator. To check how fast you're actually converting sales into cash, use the DSO Calculator.

See the formula
Working Capital = Current Assets − Current Liabilities

Current Ratio = Current Assets / Current Liabilities

Bank-readiness threshold: Current Ratio ≥ 1.5

Example: Current Assets = $150,000 | Current Liabilities = $80,000
  Working Capital = $150,000 − $80,000 = $70,000
  Current Ratio   = 150 / 80 = 1.88x → bank-ready

Worked example

A South African e-commerce business pulls its July balance sheet before approaching FNB for a R500,000 working-capital facility. Current assets total R1.2 million: R380,000 cash, R420,000 in accounts receivable, R350,000 in inventory, R50,000 in prepaid expenses. Current liabilities total R780,000: R420,000 in accounts payable, R180,000 in the current portion of a SARS payment arrangement, R120,000 in payroll due, R60,000 in VAT due.

Working capital = R1,200,000 − R780,000 = R420,000. Current ratio = 1.54x. The headline number clears the 1.5 threshold — but the bank will discount the inventory. Marked down at 50% (R175,000 written off conceptually), effective current assets drop to R1,025,000 and the stressed ratio falls to 1.31x — below the threshold.

The owner has three levers before applying. First, accelerate receivables collection by 15 days to convert R75,000 of AR into cash. Second, negotiate the SARS payment arrangement to push R80,000 of the current portion out beyond 12 months. Third, run a short clearance promotion to liquidate R150,000 of slow inventory. Any one of these gets the stressed ratio comfortably above 1.5; all three together produce a confident 1.8 and a much better conversation with the credit committee.

Frequently Asked Questions

What is working capital?
Working capital is current assets minus current liabilities — the cash buffer a business has after settling everything due within 12 months. Positive working capital means short-term obligations are fully covered; negative working capital means the business cannot meet near-term commitments from short-term assets.
What is a good current ratio?
Most commercial lenders treat 1.5 as the floor for unsecured working-capital lending. Below 1.0 is a solvency risk. Above 3.0 may indicate idle cash or slow-moving inventory that could be deployed more productively. The 1.5-2.5 band is typical for healthy small businesses.
How do I calculate working capital from a balance sheet?
Sum the current assets (cash, accounts receivable, inventory, prepaid expenses) and subtract the current liabilities (accounts payable, short-term debt, accrued expenses, taxes due, current portion of long-term debt). The result is working capital. Divide assets by liabilities for the ratio.
What counts as a current asset?
Anything expected to convert to cash within 12 months — bank cash, accounts receivable, inventory at realisable value, prepaid expenses, and short-term marketable securities. Long-term receivables and fixed assets like property and equipment are excluded.
What counts as a current liability?
Obligations due within 12 months — accounts payable to suppliers, short-term debt, accrued payroll and bonuses, taxes due, and the current portion of long-term loans. The current portion of a five-year loan is the most commonly missed item.
Why do banks discount inventory when assessing working capital?
Because inventory book value often overstates realisable value. Slow-moving stock, seasonal goods past their season, and damaged or obsolete items would not fetch full price in a fire sale. Most banks apply a 40-60% discount to inventory when stress-testing the current ratio. A 1.8x book ratio can fall to 1.2x after this adjustment.
Is negative working capital always bad?
Not always. Some retail and quick-service business models run on negative working capital deliberately — customers pay at point of sale while suppliers extend 30-60 day terms. Walmart, McDonald's, and most subscription businesses operate this way. For small businesses without a strong supplier-payment position, negative working capital is usually a problem.
How does working capital differ from cash flow?
Working capital is a balance-sheet snapshot — assets minus liabilities at a point in time. Cash flow is the movement of cash over a period — the income-statement view. A business can have positive working capital and still run out of cash if collections lag payments. Use both together for a full picture.
How can I improve my current ratio quickly?
Three fast levers. First, accelerate collections to convert AR into cash (use the DSO Calculator to size the prize). Second, negotiate longer terms with suppliers to push payables out beyond 12 months where possible. Third, clear slow inventory through a targeted promotion. Each one moves the ratio by 0.1-0.3x typically.
What current ratio do US, UK, and SA banks expect?
All three lending markets converge on roughly 1.5x as the floor for unsecured working-capital lending. SBA 7(a) loans in the US, RBS/NatWest small-business lending in the UK, and FNB/Standard Bank business banking in SA all reference this threshold. Asset-backed lending (equipment finance, invoice factoring) is more lenient because the security shifts the risk profile.

Glossary

Current Assets
Assets that will be converted to cash within 12 months — cash, receivables, inventory, prepaid expenses.
Current Liabilities
Obligations due within 12 months — payables, short-term debt, accrued expenses, current portion of long-term debt.
Current Ratio
Current assets divided by current liabilities — a multiple that measures short-term liquidity. Banks typically want 1.5 or higher.

Related calculators

Cash Flow Calculator

Project 12-month cash flow from income and expenses.

Open →

DSO Calculator

Days Sales Outstanding and the cash released by faster collections.

Open →

Business Loan Calculator

Calculate monthly repayments and total interest.

Open →

Methodology & sources

Rates last verified: May 2026

Read the full methodology →

Standard accounting formula. The 1.5 bank-readiness threshold is conventional across US, UK, and SA commercial lending. Stress-testing the ratio with a 50% inventory write-down is recommended before any bank application.

Rates are reviewed annually or when a region changes its headline rate. If you spot one that's out of date, email [email protected].

For information only. This calculator does not constitute financial, accounting, or tax advice. Consult a qualified professional before making business decisions.

Try these scenarios

Pre-filled examples — click any chip to load the inputs and result.

How to calculate working capital and current ratio

  1. Add up current assetsTotal cash, accounts receivable, inventory, and prepaid expenses — anything convertible to cash within 12 months.
  2. Add up current liabilitiesAccounts payable, short-term debt, accrued expenses, taxes due, and the current portion of long-term loans.
  3. Read the working capital and current ratioThe calculator subtracts to find working capital and divides to find the ratio.
  4. Check the bank-readiness flagA current ratio of 1.5 or higher is the conventional floor for working-capital lending.

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Written by

James Blanckenberg

Founder, BusCalcTools

Founder of BusCalcTools and FinnCalc. Builds practical financial calculators for small business owners and freelancers across the US, UK, and South Africa.

Editorial review by: James Blanckenberg, Founder & Editor

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