In financial terms, working capital is calculated as the excess value of a company’s current assets (cash, cash equivalents, accounts receivable, etc.) divided by its current liabilities (accounts payable, etc.).
Current assets – current liabilities = working capital
“Current" refers to assets that are relatively liquid and can be converted into cash in less than one year or liabilities that are due in less than one year. Lenders pay close attention to changes in a company’s current assets and current liabilities because businesses need enough short-term cash to make routine principal and interest payments on bank debt.
For extra empowerment, calculate your company’s working capital or current ratio, as follows:
Current assets / current liabilities = current ratio
Commercial lenders offer better loan terms to revenue-generating, profitable companies with consistent working capital ratios over 1.2.