What Is Balance Sheet Capital and How To Calculate It

Working capital is the current assets and cash a business has available subtracted by the current liabilities.

By Brad Nakase, Attorney

Email  |  Call (888) 600-8654

Have a quick question? I answered nearly 1500 FAQs.

What Is Working Capital?

There are a number of different metrics a business owner can use to evaluate his or her company’s financial health. One of the most important of these measurements is known as working capital. Like cash flow, working capital is a value that is constantly changing. Because of this, a business owner will need to study his or her balance sheet in order to calculate the business’ current amount of working capital.

Working capital may be defined as the amount of capital that a company has, which is not reserved for paying back short-term liabilities. This means that working capital is essentially the amount of capital that a business owner has to use. Working capital is valuable to a business, and a company should endeavor to have as much working capital as it can achieve. With more capital available to use, a company will have access to a greater amount of assets that it can choose to use, save, or sell. Please contact our San Diego business dispute attorney if your company is missing working capital and suspects foul play.

How To Calculate Working Capital

The formula for calculating working capital is actually very simple:

Working Capital = Current Assets – Current Liabilities

The above values, current assets and liabilities, may both be found on the company’s balance sheet. Unlike a company’s income statement, a business’ balance sheet is a picture of a specific moment in time. This means that the numbers on the balance sheet are always changing. Whenever a business changes its amount of liabilities or current assets, the company’s working capital will change as a result.

Currents assets reflect the total amount that a business owns when it comes to cash and liquid assets. This also includes items that will be turned into cash within the next year. Examples of current assets might be accounts receivable, cash, inventory, and commercial paper.

Current liabilities may be defined as the amount a business needs to pay back his or her creditors with a year’s time. Examples of current liabilities might be operating expenses, accounts payable, and taxes.

A business’ current amount of capital can be altered in a number of ways. If a business increases it current assets or reduces its current liabilities, then the total amount of working capital will grow. If a business reduces its current assets or increases its current liabilities, then its total amount of capital will decrease.

There are many formulas that a business owner can take away from his or her company’s income statement or balance sheet. Still, even with the creation of new formulas, capital remains one of the most useful measurements.

Since capital is derived from both liabilities and current assets, the formula is more useful for making decisions for the short-term. It is very useful for companies that must make important decisions regarding their financing.

How Is Working Capital Useful to a Business?

A lot of entrepreneurs think that working capital is one of the most beneficial numbers that can be taken from a balance sheet. By understanding the significance of working capital, a business owner can help his or her company decide on important matters including:

  • How to adjust the level of capital use to respond to changes in the business cycle (as can happen with seasonal retailers)
  • If a business owner should apply for a business loan
  • Understand the possible risks and rewards associated with changing elements of the company’s operations


While capital should not be the only financial measurement that a business owner keeps track of, it is still very helpful for almost every kind of business.

Have a quick question? We answered nearly 2000 FAQs.

See all blogs: Business | Corporate | Employment Law

Most recent blogs:

What is a default judgment

What is a default judgment

A default judgment is issued when a defendant fails to respond to a lawsuit, allowing the plaintiff to win by default. Understanding this process is crucial for both parties involved in litigation.
What is a quitclaim deed

What is a quitclaim deed

Quitclaim deeds offer a quick way to transfer property ownership without guarantees, distinct from warranty deeds. Ideal for non-sale property transfers among family or into trusts, they require careful legal consideration.
Sole Proprietorship Business License

Sole Proprietorship Business License

Sole proprietorships offer simplicity and fewer formalities for new business owners, with benefits like no separate taxes. Remember, personal and business assets aren't distinct, impacting liabilities and the need for proper licensing.
What is the most important part of your business plan

What is the most important part of your business plan

The executive summary shines as the pivotal element of a business plan, serving as a decisive factor for readers to delve deeper. A comprehensive guide on crafting an impactful business plan, focusing on unique strategies and essential components.
Easy Businesses To Start

Easy Businesses To Start

Unleash your entrepreneurial spirit with these straightforward home-based business ideas, from e-commerce to creative pursuits. Embrace the flexibility and potential for financial independence with diverse options suited for various interests and investment levels.
What is the standard deduction

What is the standard deduction

Understand the IRS standard deduction, a straightforward option for reducing taxable income without needing detailed documentation. Delve into eligibility, amounts for 2023-2024, and considerations for itemizing versus standard deduction.
How to get a business license

How to get a business license

Grasp the essentials of obtaining a business license in California, focusing on local and state-level requirements. Uncover specifics on when and why different types of business licenses are needed.
Why Do Businesses Fail

Why Do Businesses Fail

Uncover the key factors contributing to small business challenges, including financial obstacles, inadequate management, and flawed marketing strategies. Understand the role of a comprehensive business plan in ensuring long-term success.
What is a BOC 3

What is a BOC 3

Understand the essentials of a BOC-3 filing for transportation businesses in California, detailing the designation of process agents for FMCSA certification. Learn the requirements, costs, and benefits of choosing the right process agent for your business.
Standard deduction vs itemized deduction

Standard Deduction vs Itemized Deduction

Understand the key differences between standard and itemized deductions to effectively reduce your taxable income and potentially save on taxes. Choose wisely to maximize your tax benefits based on personal financial details.
How to calculate net income

How to calculate net income

Unveil the significance of calculating net income for business profitability, a key indicator for financial health and decision-making. Understand the formula and practical applications for determining net earnings.
Itemized deductions

Itemized Deductions

Optimize your tax return by understanding the differences between itemized and standard deductions, crucial for minimizing tax liability. Learn the benefits and challenges of itemizing to make informed financial decisions.
What are intangible assets

What Are Intangible Assets

Discover the value of intangible assets like patents and trademarks in your business, crucial for strategic and financial planning. Learn how to manage and amortize these non-physical yet essential resources.
What is accounting

What Is Accounting

Understand the importance of accounting in monitoring financial activities and making informed decisions for your business. Gain insight into accounting fundamentals and its role in legal and tax matters.
Dysfunctional family

Dysfunctional Family

Explore the impact of growing up in a dysfunctional family, where constant conflict, neglect, and various addictions shape childhood experiences. Understand common traits, the consequences on children, and the cycle of unhealthy parenting behaviors.
When Was the Great Recession

When Was the Great Recession?

Delve into the Great Recession's timeline, an era of financial distress from December 2007 to June 2009. Understand the causes, including the 2007 housing bubble crash, and worldwide effects.
When Was the Last Recession in the US

When Was the Last Recession in the US?

Review discussions on America's most recent downturn, comparing the impacts and definitions of Covid-19 and the Great Recession. Analyze the significant effects of past economic crises on US policy and business approaches.
What to Invest in During a Recession- 4 Ideas

What to Invest in During a Recession: 4 Ideas

Uncover effective strategies for investing during a recession, assessing personal goals and current market situations. Examine four robust investment approaches to manage through economic declines effectively.
Will the US Get Hit with a Recession in 2024

Will the US Get Hit with a Recession in 2024?

Experts debate the likelihood of a 2024 US recession, analyzing factors like the yield curve and consumer confidence. Predictions vary, with a focus on interest rates and tech layoffs impacting the economy's future.
How Long Do Recessions Last

How Long Do Recessions Last?

Learn about typical US recession lengths and influencing factors, noting recent trends with shorter durations averaging 10 months. Investigate how external factors and government decisions affect recession timelines, comparing historical data.
When Will the Recession End

When Will the Recession End?

Economists predict a mild US recession with limited impact on employment and spending. The duration and impact of the recession depend on Federal Reserve policies and business cycle patterns.

When not to sign a severance agreement?

Do not sign a severance agreement if you do not understand it. By agreeing to a severance agreement, you give up your right to sue your employer. Remember, it is possible to negotiate the terms of your severance package. You are not required to sign a severance agreement.

How Do You Deal with a Toxic Business Partner?

Address concerns directly to the bad business partner; communicate openly and clearly. Consider mediation or seek legal advice from a business dispute attorney. Document disagreements, consider amicable separation if necessary.

Contact our attorney.

Please tell us your story:

1 + 0 = ?


© Copyright | Nakase Law Firm (2019)