Quick answer: Working capital is the money a business has available to run day to day. It equals current assets (cash, receivables, inventory) minus current liabilities (bills, payroll and debt due within a year). Most small businesses aim for a working capital ratio between about 1.2 and 2.0 and enough cash to cover roughly three to six months of operating expenses.
How to calculate working capital
Working capital = current assets − current liabilities
| Current assets | Current liabilities |
|---|---|
| Cash in bank accounts | Accounts payable to suppliers |
| Accounts receivable (money customers owe you) | Payroll and payroll taxes due |
| Inventory | Loan and credit card payments due within 12 months |
| Prepaid expenses | Rent, utilities and other short-term bills |
Example: A business with $120,000 in cash, receivables and inventory and $80,000 in bills due within the year has $40,000 of working capital.
What is a good working capital ratio?
Working capital ratio = current assets ÷ current liabilities.
- Below 1.0: You owe more in the short term than you have — a warning sign.
- About 1.2 to 2.0: Generally healthy for most small businesses.
- Well above 2.0: Very safe, but you may have cash sitting idle that could be invested in growth.
The right number depends on your industry. Restaurants and retailers turn inventory quickly and can run leaner; contractors and wholesalers waiting on invoices usually need more.
How much cash should a small business keep?
A common rule of thumb is three to six months of operating expenses. Seasonal businesses, companies with slow-paying customers and businesses with a few large clients should lean toward the higher end.
Signs you are short on working capital
- You regularly delay paying suppliers or payroll feels tight
- You turn down large orders because you can’t buy materials
- Your bank account dips close to zero or overdrafts
- You rely on personal credit cards to cover business bills
How to improve working capital
- Collect faster: invoice immediately, offer early-payment discounts, follow up on late accounts.
- Manage inventory: reduce slow-moving stock.
- Negotiate supplier terms: longer payment terms keep cash in your account.
- Cut or delay non-essential spending.
- Add financing: a business line of credit is built for working capital gaps; a short-term loan works for one-time needs.
Related Guides
- Best Working Capital Options for Seasonal Businesses
- How to Get Approved for a Small Business Loan: 12 Tips That Work
- Typical Small Business Loan Repayment Terms Explained
- Section 179 Explained: Deduct Equipment Purchases This Year
- Same-Day Business Loans: How They Work and How to Get Funded Today
- Business Term Loan vs. Line of Credit: Which Is Better for Your Business?
Frequently Asked Questions
What is working capital in simple terms?
Working capital is the money available to run your business day to day: what you have coming in over the next year (cash, receivables, inventory) minus what you owe over the next year.
What is a good working capital ratio for a small business?
Generally about 1.2 to 2.0. Below 1.0 means short-term bills exceed short-term assets.
How can I get working capital fast?
A business line of credit or short-term business loan. Brookestone Funding can fund qualified businesses the same day, with lines of credit typically set up in 1–3 days.
Is working capital the same as cash flow?
No. Working capital is a snapshot of short-term assets minus liabilities; cash flow is the movement of money in and out over time. Both matter.
Need financing? Brookestone Funding offers business term loans, lines of credit and SBA loans from $10,000 to $2,000,000, with same-day funding available for qualified businesses. We’re rated 4.5 on Trustpilot by more than 240 customers. Apply in minutes, see our business loan options, or call 212-258-0602.
