How it works
Working capital is the cushion of short-term assets left after covering short-term obligations. Positive working capital means the business can pay bills coming due in the next year from assets that will turn into cash in that time.
The current ratio divides current assets by current liabilities. The quick ratio leaves out inventory and prepaid expenses, counting only cash and receivables, because inventory can be slow to convert to cash.
Formula
Working capital = Current assets − Current liabilities. Current ratio = Current assets ÷ Current liabilities. Quick ratio = (Cash + Receivables) ÷ Current liabilities.
Questions people ask
What is a good current ratio?
Roughly 1.2 to 2 is considered healthy for many businesses. Below 1 suggests potential cash strain; well above 3 can mean cash or inventory is sitting idle.
What is a good quick ratio?
A quick ratio of 1 or more means the business can cover current liabilities without selling inventory. Retailers with fast-moving inventory often run below 1 comfortably.
Can negative working capital be fine?
Sometimes. Businesses that collect cash before paying suppliers, like grocery chains, fast food and subscription software with upfront billing, can operate safely with negative working capital.