How working capital works
Working capital is calculated by subtracting total current liabilities from total current assets, both taken from the balance sheet. Positive working capital means a business can cover what it owes in the next year with what it already has or expects to collect soon. The working capital ratio, current assets divided by current liabilities, is another common way to express the same relationship.
Working capital changes constantly as invoices go out, bills come due, and inventory moves. Businesses watch it closely because even a profitable company can run into trouble if too much cash is tied up in slow-paying receivables or excess inventory, leaving too little on hand to pay bills. A business with negative working capital can still operate normally in the short term, but it usually signals a cash position worth watching closely.
Example
A company has $150,000 in current assets, made up of $60,000 cash, $70,000 accounts receivable, and $20,000 inventory, and $90,000 in current liabilities. Working capital equals $150,000 minus $90,000, which is $60,000. That $60,000 cushion represents resources available beyond what the business owes in the near term.
Working capital in QuickBooks Online vs Xero
Not software-specific: QuickBooks Online and Xero both display current assets and current liabilities on the standard balance sheet report, which is all that is needed to calculate working capital. Neither platform labels the working capital figure directly, so it is usually a quick manual subtraction from the report. Both platforms let you customize the balance sheet report to show current assets and current liabilities as clear subtotals.
Related terms
How LedgerBPO handles working capital
We track your working capital every month as part of financial reporting, so you can see whether your short-term cushion is growing or shrinking. A dedicated accountant explains what is driving the change, whether it is slower collections, rising inventory, or new debt. You get an early warning before a cash squeeze becomes serious. We flag a shrinking working capital position early, well before it turns into a cash flow emergency.