Courses / Working Capital

Working Capital

10 Lessons | 1 Quiz

Working Capital is an important element on both the Balance Sheet and the Cash Flow Statement. It’s a measure of liquidity and its change from one period to another reconciles the time gap between when revenue / expenses are recorded on the Income Statement and when cash is actually received / paid on the Cash Flow Statement. We’ll learn about the concept of working capital first, then we’re going to dive deeper into the calculations, especially the opposite formulas when calculating changes in current assets versus current liabilities.

Key Takeaways:

  • How working capital reconciles time gap between recognition and cash flow
  • Why changes in working capital impact cash flow
  • Analyzing a business’s efficiency and liquidity


1. What is Working Capital


Working Capital as a measure of liquidity as of a specific point in time. Working Capital = Current Assets - Current Liabilities.

2. Net Operating Working Capital


Net Operating Working Capital is conceptually the same as Working Capital, except it excludes financial items.

3. Changes in Working Capital


Changes in Working Capital calculates how much working capital changed from one period to the next.

4. Changes in Working Capital as Cash Flow Adjustments


In this video, we'll walk through how changes in each operating current asset or liability is a reconciliation of the time gap.

5. Where to Find Changes in Working Capital


The best place to find Changes in Working Capital is on the Cash Flow Statement.

6. Calculating Changes in Working Capital


Make sure you pay attention to the fact that the formulas for operating current asset is DIFFERENT from operating liabilities.

7. Working Capital Efficiency Ratios


Working Capital efficiency ratios measure how efficiently the business is running itself such that it can free up as much cash as possible.

8. Current Ratio


Current Ratio is a metric that measures the company’s ability to use cash from Current Assets to pay cash for Current Liabilities.

9. Quick Ratio


Quick Ratio is a metric that measures ability to pay off obligations due within 12 months with only cash from highly liquid assets.

10. Connecting Dots


Let's go over how working capital ties the Income Statement, Balance Sheet and the Cash Flow Statement together.