Working capital is current assets minus current liabilities: the short-term resources a business has left after covering its short-term obligations. Finance teams also track trade working capital, which is receivables plus inventory minus payables, because that is the cash tied up in day-to-day operations.
What is working capital?
Current assets are what a business expects to turn into cash within its operating cycle or the next 12 months: cash, receivables, inventory and prepayments. Current liabilities are what it expects to settle in the same window: payables, accruals, short-term debt and taxes due. Working capital is the difference.
IFRS draws the line. An asset is current when the company expects to realise it in its normal operating cycle or within 12 months after the reporting period, holds it mainly for trading, or it is cash or a cash equivalent. A liability is current when it is expected to be settled in the normal operating cycle, is held for trading, is due within 12 months, or the company has no right to defer settlement for at least 12 months. IFRS 18, which replaces IAS 1 for annual periods beginning on or after 1 January 2027, carries these rules in paragraphs 99 and 101.
How do you calculate working capital?
| Measure | Formula | What it tells you |
|---|---|---|
| Working capital | Current assets − current liabilities | Short-term cover, in riyals |
| Current ratio | Current assets ÷ current liabilities | Cover as a multiple; below 1 means short-term liabilities exceed short-term assets |
| Trade working capital | Receivables + inventory − payables | The cash tied up in operations |
| Cash conversion cycle | DSO + days inventory outstanding − days payable outstanding | Days between paying suppliers and collecting from customers |
The operating cycle is the time between acquiring assets for processing and turning them into cash; where it is not clearly identifiable, IFRS assumes 12 months (IFRS 18, paragraph B95).
What does a working capital calculation look like?
Why does working capital matter?
Growth uses working capital: more sales mean more receivables and inventory before the cash arrives. A profitable company can still run short of cash if collection slows or stock builds up. The cash flow statement shows this as the change in working capital inside operating cash flow.
The levers are days sales outstanding, inventory days and supplier terms. Each day freed is cash the business no longer has to borrow, and a 13-week cash flow forecast shows when it lands. Bank facilities often test the current ratio as a covenant, so a falling ratio can matter to lenders before it matters to cash.
Questions people ask
Can working capital be negative?
Yes, when current liabilities exceed current assets. That can signal a liquidity problem, but some businesses, such as retailers paid in cash at the till who pay suppliers on terms, run with negative working capital by design.
Is cash part of working capital?
Cash is a current asset, so it is part of working capital. Trade working capital leaves it out, so you can see the cash tied up in operations separately from the cash in the bank.
How does working capital affect cash flow?
An increase in receivables or inventory uses cash, and an increase in payables provides it. In an indirect cash flow statement these movements adjust profit to reach operating cash flow.
Official and primary sources, read on the date shown. Rules change: confirm with the authority or your adviser before you act.