Working capital are the resources available to a company to run it’s day-to-day operations smoothly. Working capital comprise of cash and liquid assets available to a company after paying it’s current liabilities. In other words, if we deduct current liabilites of a company from current assets what will remain is called working capital or net working capital.

**Working Capital Calculation using an Example**

For calculating working capital the following **working capital formula** is used:

Working Capital = Current Assets — Current Liabilities

Let’s take an example to calculate working capital of Britney Spears Computers. Following is the balance sheet extract of Britney Spears Computers.

Using the data from Britney Spears Computers Balance Sheet Extract, the company have following current assets.

- Cash $30,000
- Marketable Securities $11,000
- Notes Receivable $5,000
- Accounts Receivable $60,000
- Inventory $70,000
- Prepaid Expenses $4,000

Total current assets of Britney Spears Computers = $180,000. Total current assets of a company also known as Gross Working Capital (Gross Working Capital = $180,000). The company have following current liabilities.

- Notes Payable $10,000
- Accounts Payable $62,000
- Income Tax Payable $13,000
- Sales Tax Payable $3,000
- Accrued Expenses Payable $8,000
- Unearned Revenue $4,000

Total current liabilities of Britney Spears Computers = $100,000. Working capital of Britney Spears Computers is just the difference between it’s current assets and current liabilities. Using working capital formula as mentioned above.

Working Capital = Current Assets — Current Liabilities

Working Capital = $180,000 — $100,000

Working Capital = $80,000

The formula used above to calculate working capital is also known as **Net Working Capital Formula**. Using the same data of Britney Spears Computers, we can calculate Working Capital Ratio of the company as follows.

Working Capital Ratio = Current Assets / Current Liabilities

Working Capital Ratio = ($180,000 / $100,000) x 100

Working Capital Ratio = 1.8%

Therefore, Britney Spears Computers has working capital raio of 1.8% which means that the company has $1.8 for every $1 of it’s current liability. This also means that the company has bright future prospects and healthy financial position.

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