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Home / Accountant Library / Glossary / Financial analysis and ratios

Working capital

In one sentenceThe difference between current assets and current liabilities, measuring the business's ability to fund its day-to-day activity.

Simply put

Working capital is the money that keeps the business turning: cash, inventory and receivables, after deducting what you must pay within a year to suppliers, banks and others.

If it is positive you have a cushion that covers your short-term obligations, and if it is negative you may need financing or faster collection to pay on time. A large increase is not always good: it may mean slow-moving inventory or overdue customer debts.

Worked example

An auto parts store has current assets of 800,000 SAR (cash, inventory and customer receivables) and current liabilities of 500,000 SAR (suppliers and a short-term loan).

Current assets800,000 SAR
Current liabilities500,000 SAR
Working capital = 800,000 − 500,000300,000 SAR

Formula: Current assets − current liabilities

Don't confuse it with

Current ratioWorking capital is an amount in SAR, while the current ratio divides the same two items, giving a number with no unit that is easy to compare between businesses of different sizes.

in FullScreen ERP

The final statements in General accounts show the financial position with its current assets and liabilities. General accounts