How do I calculate working capital and the current ratio? The two answers come from the same snapshot. One is dollars left after current debts. The other is how many times current assets cover those debts.
The SBA glossary defines current assets as cash, receivables, inventory, and other items that could convert to cash in less than one year. Current liabilities are amounts due within one year. Working capital is current assets left after current debts are paid.
An SEC computation of ratios exhibit writes the current ratio as current assets divided by current liabilities. The working capital calculator prints both, and a quick ratio that removes inventory:
Current assets = cash + receivables + inventory + other current assets
Current liabilities = accounts payable + other current liabilities
Working capital = current assets − current liabilities
Current ratio = current assets ÷ current liabilities
Quick ratio = (current assets − inventory) ÷ current liabilities
The quick ratio calculator uses these same six lines and leads with the quick figure. Months until cash hits zero are the cash runway calculator. Household assets minus household debts are the net worth calculator, covered in the net worth post.
These are snapshots from the balances you type. They are not a credit decision, and they are not business advice.
Fig 1
One snapshot, two answers
Inventory stays in the current ratio
Add the asset lines. Add the liability lines. Subtract for working capital. Divide for the current ratio. The quick ratio drops inventory first.
What a ratio above 1 means
On this formula, a current ratio above 1 means current assets are larger than current liabilities. Working capital is then positive. A ratio below 1 means the debts due inside a year are larger than those assets, and working capital is negative. Example 6 is that case.
Read the dollars, then the current ratio, then the quick ratio. The SEC exhibit and the SBA glossary define the arithmetic. Example 8 keeps the current ratio at 3× and the quick ratio at 0.5×, because most of those assets are inventory.
Example 1: the calculator defaults
Inputs:
- cash: $40,000
- accounts receivable: $45,000
- inventory: $90,000
- other current assets: $5,000
- accounts payable: $35,000
- other current liabilities: $25,000
Current assets: 40,000 + 45,000 + 90,000 + 5,000 = $180,000.00
Current liabilities: 35,000 + 25,000 = $60,000.00
Working capital: 180,000 − 60,000 = $120,000.00
Current ratio: 180,000 ÷ 60,000 = 3×
Quick assets: 180,000 − 90,000 = $90,000.00
Quick ratio: 90,000 ÷ 60,000 = 1.5×
Calculator result
Working capital ratio
- Cash and equivalents
- $40,000.00
- Accounts receivable
- $45,000.00
- Inventory
- $90,000.00
- Other current assets
- $5,000.00
- Accounts payable
- $35,000.00
- Other current liabilities
- $25,000.00
$120,000.00
working capital
- Current ratio
- 3×
- Quick ratio
- 1.5×
- Current assets
- $180,000.00
Inventory is 90,000 ÷ 180,000 = 50% of current assets. Cash is 40,000 ÷ 180,000 = 22.2%. Receivables are 45,000 ÷ 180,000 = 25%. Other assets are 5,000 ÷ 180,000 = 2.8%. Those shares add to 100.
Fig 2 · 1/3
What the current assets are made of
Three snapshots. Other current assets sit with cash: $5,000, $0, and $3,000.
Current assets
- Cash and other
- Receivables
- Inventory
| Category | Cash and other | Receivables | Inventory |
|---|---|---|---|
| Default | $45k | $45k | $90k |
| Retailer | $8.0k | $12k | $70k |
| Service | $58k | $40k | $2.0k |
The default stack is $180,000. Half of it is inventory.
The service firm is $100,000, and almost all of that is cash and receivables.
Example 2: a retailer with a thin quick ratio
Inputs: cash $8,000, receivables $12,000, inventory $70,000, other assets $0, payables $40,000, other liabilities $22,000.
Current assets: 8,000 + 12,000 + 70,000 + 0 = $90,000.00
Current liabilities: 40,000 + 22,000 = $62,000.00
Working capital: 90,000 − 62,000 = $28,000.00
Current ratio: 90,000 ÷ 62,000 = 1.4516, shown as 1.45×
Quick assets: 90,000 − 70,000 = $20,000.00
Quick ratio: 20,000 ÷ 62,000 = 0.3226, shown as 0.32×
Calculator result
Working capital ratio
- Cash and equivalents
- $8,000.00
- Accounts receivable
- $12,000.00
- Inventory
- $70,000.00
- Other current assets
- $0.00
- Accounts payable
- $40,000.00
- Other current liabilities
- $22,000.00
$28,000.00
working capital
- Current ratio
- 1.45×
- Quick ratio
- 0.32×
- Current assets
- $90,000.00
The current ratio is still above 1, so working capital is positive. The quick ratio is below 1. Cash plus receivables cover 20,000 ÷ 62,000 of the debts due inside a year. The other cover is inventory.
Example 3: a service firm with little stock
Inputs: cash $55,000, receivables $40,000, inventory $2,000, other assets $3,000, payables $18,000, other liabilities $12,000.
Current assets: 55,000 + 40,000 + 2,000 + 3,000 = $100,000.00
Current liabilities: 18,000 + 12,000 = $30,000.00
Working capital: 100,000 − 30,000 = $70,000.00
Current ratio: 100,000 ÷ 30,000 = 3.333, shown as 3.33×
Quick ratio: (100,000 − 2,000) ÷ 30,000 = 98,000 ÷ 30,000 = 3.2666, shown as 3.27×
Inventory is 2% of assets. 2,000 ÷ 100,000 = 0.02. Pulling it out barely moves the ratio, from 3.33× to 3.27×. The gap is 3.33 − 3.27 = 0.06.
Example 4: what if the next payroll is $15,000
Hold Example 1. Add $15,000 of unpaid payroll to other current liabilities. That line goes from $25,000 to $40,000. Every asset line stays put.
Current assets stay $180,000.00
Current liabilities: 35,000 + 40,000 = $75,000.00
Working capital: 180,000 − 75,000 = $105,000.00
Current ratio: 180,000 ÷ 75,000 = 2.4×
Quick ratio: 90,000 ÷ 75,000 = 1.2×
Working capital falls by the same $15,000, from $120,000 to $105,000. The current ratio falls from 3× to 2.4×. If that payroll is due inside the year and still unpaid, it belongs in the current box. Leaving it out keeps the Example 1 snapshot, which is a larger cushion than the cash plan.
Example 5: the mistake of parking a long-term note in current liabilities
Start from Example 1 again. A $240,000 note is not due inside the year, except for whatever portion actually comes due. Someone adds the whole note to other current liabilities: 25,000 + 240,000 = $265,000.
Current assets stay $180,000.00
Current liabilities: 35,000 + 265,000 = $300,000.00
Working capital: 180,000 − 300,000 = −$120,000.00
Current ratio: 180,000 ÷ 300,000 = 0.6×
Quick ratio: 90,000 ÷ 300,000 = 0.3×
Example 1 on the same assets was $120,000.00, 3×, and 1.5×. The glossary’s current liabilities are amounts due within one year. The portion of the note due inside the year can go in the box. The rest of a longer note stays out. This page will not split the note for you. You type the current piece.
Example 6: negative working capital
Inputs: cash $5,000, receivables $15,000, inventory $20,000, other assets $0, payables $35,000, other liabilities $25,000.
Current assets: 5,000 + 15,000 + 20,000 = $40,000.00
Current liabilities: 35,000 + 25,000 = $60,000.00
Working capital: 40,000 − 60,000 = −$20,000.00
Current ratio: 40,000 ÷ 60,000 = 0.666, shown as 0.67×
Quick ratio: (40,000 − 20,000) ÷ 60,000 = 20,000 ÷ 60,000 = 0.333, shown as 0.33×
Assets cover 0.67 of each dollar due inside the year on this snapshot. The dollar gap is $20,000. An unused credit line is not in the cash box unless the lender has already funded it. The runway page is where you turn a cash balance and a monthly burn into months.
Example 7: cash, and no inventory
Inputs: cash $120,000, receivables $10,000, inventory $0, other assets $0, payables $8,000, other liabilities $7,000.
Current assets: 120,000 + 10,000 = $130,000.00
Current liabilities: 8,000 + 7,000 = $15,000.00
Working capital: 130,000 − 15,000 = $115,000.00
Current ratio: 130,000 ÷ 15,000 = 8.666, shown as 8.67×
Quick ratio: inventory is zero, so the quick ratio is also 8.67×
The two ratios match when there is nothing to remove. A high multiple here is a large asset pile against a small current-debt pile. It is still one date’s balances.
Example 8: the same current ratio, a weaker quick ratio
Inputs: cash $10,000, receivables $15,000, inventory $150,000, other assets $5,000, payables $40,000, other liabilities $20,000.
Current assets: 10,000 + 15,000 + 150,000 + 5,000 = $180,000.00
Current liabilities: 40,000 + 20,000 = $60,000.00
Working capital: 180,000 − 60,000 = $120,000.00
Current ratio: 180,000 ÷ 60,000 = 3×
Quick ratio: (180,000 − 150,000) ÷ 60,000 = 30,000 ÷ 60,000 = 0.5×
Set this next to Example 1. Working capital is $120,000 in both. The current ratio is 3× in both. Inventory here is 150,000 ÷ 180,000 = 83.3% of assets, against 50% in Example 1. Quick assets fall from $90,000 to $30,000, and the quick ratio falls from 1.5× to 0.5×.
Calculator result
Working capital ratio
- Cash and equivalents
- $10,000.00
- Accounts receivable
- $15,000.00
- Inventory
- $150,000.00
- Other current assets
- $5,000.00
- Accounts payable
- $40,000.00
- Other current liabilities
- $20,000.00
$120,000.00
working capital
- Current ratio
- 3×
- Quick ratio
- 0.5×
- Current assets
- $180,000.00
Fig 3 · 1/2
Current ratio beside the quick ratio
The quick line removes inventory, then divides by the same liabilities.
Coverage
- Current
- Quick
| Category | Current | Quick |
|---|---|---|
| Default | 3 | 1.5 |
| Retailer | 1.5 | 0.3 |
| Service | 3.3 | 3.3 |
| Inventory heavy | 3 | 0.5 |
| Cash only | 8.7 | 8.7 |
The default book is 3× current and 1.5× quick.
The inventory-heavy book is still 3× current, and 0.5× quick.
Example 9: a small cafe snapshot
Inputs: cash $3,500, receivables $800, inventory $4,200, other assets $200, payables $2,100, other liabilities $1,600.
Current assets: 3,500 + 800 + 4,200 + 200 = $8,700.00
Current liabilities: 2,100 + 1,600 = $3,700.00
Working capital: 8,700 − 3,700 = $5,000.00
Current ratio: 8,700 ÷ 3,700 = 2.351, shown as 2.35×
Quick ratio: (8,700 − 4,200) ÷ 3,700 = 4,500 ÷ 3,700 = 1.216, shown as 1.22×
The dollars are a cafe’s. Example 1 used $180,000 of assets. The structure is the same test. Assets are 2.35 times liabilities. After inventory, the cover is 1.22 times. A 2.35× ratio on an $8,700 asset pile is a $5,000 cushion. The same multiple on a larger pile would be a larger cushion. Read the dollars beside the multiple.
Fig 4 · 1/3
Working capital in dollars
Positive cushions. The cafe's $5,000 and Example 6's −$20,000 sit in the table.
Working capital
Default
$120,000
Retailer
$28,000
Service
$70,000
The default cushion is $120,000.
The service firm cushion is $70,000. The retailer cushion is $28,000.
The nine results side by side
| Example | Assets | Liabilities | Working capital | Current ratio | Quick ratio |
|---|---|---|---|---|---|
| 1. Defaults | $180,000 | $60,000 | $120,000 | 3× | 1.5× |
| 2. Retailer | $90,000 | $62,000 | $28,000 | 1.45× | 0.32× |
| 3. Service firm | $100,000 | $30,000 | $70,000 | 3.33× | 3.27× |
| 4. Payroll added | $180,000 | $75,000 | $105,000 | 2.4× | 1.2× |
| 5. Whole note in current | $180,000 | $300,000 | −$120,000 | 0.6× | 0.3× |
| 6. Negative cushion | $40,000 | $60,000 | −$20,000 | 0.67× | 0.33× |
| 7. Cash, no inventory | $130,000 | $15,000 | $115,000 | 8.67× | 8.67× |
| 8. Inventory heavy | $180,000 | $60,000 | $120,000 | 3× | 0.5× |
| 9. Cafe | $8,700 | $3,700 | $5,000 | 2.35× | 1.22× |
Example 5 is the long-term note typed as if it were all due inside a year. Example 4 is the same default assets with $15,000 more current debt. Example 8 matches Example 1 on working capital and the current ratio, then parts company on the quick ratio.
The cash conversion cycle, in the cycle post, turns inventory, receivables, and payables into days. This page leaves them in dollars. Use the days when you want the wait. Use these multiples when you want the cover on one date.