This worksheet shows how to calculate the working capital ratio (current assets divided by current liabilities) and net working capital by hand from a balance sheet. The calculator computes a loan's monthly payment, total interest and total repaid. Rowanglen Business Loans, a small-business funding broker in Pocatello, ID, provides both as illustrative arithmetic only.
The formula
Working capital ratio = current assets ÷ current liabilities
Net working capital = current assets − current liabilities
The working capital ratio and the current ratio are the same calculation under two names. Net working capital is the dollar version: the cushion left after paying everything due within the year.
Finding the numbers on a balance sheet
| Current assets | Current liabilities |
|---|---|
| Cash and bank balances | Accounts payable to suppliers |
| Accounts receivable you expect to collect | Wages, payroll taxes and sales tax owed |
| Inventory held for sale | Credit card and line of credit balances |
| Prepaid expenses | Loan principal due within twelve months |
Leave out equipment, vehicles and property, and the part of any loan due after the next twelve months. Those are long-term items.
Worked by hand, with hypothetical figures
A hypothetical shop has $180,000 in current assets and $120,000 in current liabilities. Its working capital ratio is 180,000 ÷ 120,000 = 1.5, and its net working capital is $60,000. These are made-up figures to show the arithmetic, not a benchmark.
Using the calculator for a new loan
- Amount: the loan amount you are considering.
- Interest rate: the annual note rate from an offer you hold, or one you want to test.
- Term: the term in months.
Out come three figures: the monthly payment, the total interest and the total repaid. It does not compute the ratio; that step is by hand. If the loan's cash is held in the bank, add the amount to current assets; add the principal due in the next twelve months to current liabilities. For a loan of twelve months or less, that is the whole amount.
What a short loan does to the ratio
Continuing the hypothetical: a $30,000 loan repaid within a year adds $30,000 to both sides. The ratio becomes 210,000 ÷ 150,000 = 1.4, while net working capital stays $60,000. Short-term borrowing does not add cushion by itself; it moves the timing of cash. It helps when the money turns into receivables or stock that convert to cash before the payments fall due.
What is an ideal working capital ratio?
There is no single number that every lender uses. A ratio below 1 means current liabilities exceed current assets, which deserves a close look. A very high ratio can mean cash or stock sitting idle. What counts as healthy depends on the industry and on how quickly receivables and stock turn into cash, so compare your ratio with your own history and with businesses like yours. Each partner applies its own standards.
Using the result
If the ratio is tight because of a timing gap, working capital financing or a line of credit may help. If it is tight because costs exceed revenue, more debt is unlikely to fix it. Further reading is collected in the resources section.
By Rowanglen Business Loans · Updated