How to calculate working capital requirements?

2 min read

The working capital requirement formula involves a simple subtraction of a company’s current liabilities from its total assets.

Some of the main constituents of the current assets of a company are:

  • Cash in hand that a company has
  • The stock or inventory the company holds
  • Debtors yet to pay their dues for purchasing goods from the company
  • Expenses paid for in advance

The current liabilities may comprise:

  • Outstanding payments to be made to creditors
  • Other unpaid expenses
  • Other short-term debts to be paid off

Working capital formula

The working capital represents a company’s liquidity status, i.e., its ability to meet short-term operational liabilities through assets convertible to cash. A business has adequate working capital when its current assets exceed the value of current liabilities by a healthy margin.

Ideally, a working capital ratio between 1.2 and 2 is considered adequate for optimum performance.

The formula for working capital calculation takes into consideration all current assets existing in business except cash. Available cash is the ultimate measure of liquidity and frequently changes with either receipt or payment. Adding it to the current assets does not portray an accurate picture of liquidity a business has.

The working capital formula used for calculation is as follows.

Working Capital (WC) = Current Assets (CA) – Current Liabilities (CL)

Here is an illustration to help you understand working capital calculation:

Say your business has the following current assets:

  • Goods sold on credit: Rs. 2,00,000
  • Raw Materials: Rs. 1,00,000
  • Cash in hand: Rs. 3,50,000
  • Obsolete inventory: Rs. 40,000
  • Loans given to employees: Rs. 50,000

The total value of the current asset would thus be a sum of the values given above, i.e., Rs. 5,60,000.

The current liabilities include:

  • Outstanding funds payable to creditors: Rs. 2,70,000
  • Unpaid expenses: Rs. 80,000

The total value of current liabilities thus stands at Rs. 2,10,000 (A sum of the above two values).

Now, using the working capital formula, you can estimate the business’s liquidity status.

WC = CA – CL

= Rs. 5,60,000 – Rs. 3,50,000

= Rs. 2,10,000

With this calculation, a business can estimate the working capital it needs. In case of a deficit, the concern can opt for a working capital loan to meet the expenditure requirements.

Bajaj Finserv brings a high-value loan of up to Rs. 75 lakh to help a business fund its working capital needs and operate at optimum efficiency. Avail of the loan and repay affordably with competitive interest rates on offer.

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