Working capital

Editorial approval scope: The team checked current source fidelity, scope boundaries, dates, arithmetic, reader usefulness, practical workflow, and general-information limitations.

The formula is a balance-sheet snapshot

working capital = current assets − current liabilities

Current assets are resources expected to be realized, sold, or consumed within the applicable current classification period. For an ABA practice, they may include unrestricted cash, net accounts receivable, and some prepaid expenses. Current liabilities may include accounts payable, accrued payroll and taxes, current debt, refunds, recoupments, and other obligations due within that period.

Use the practice's approved accounting policy for classification. Do not move a balance between current and long-term categories merely to improve the metric. Reconcile subsidiary records to the general ledger and attach the balance-sheet date. A working-capital number without its date can become stale quickly.

The IRS Internal Revenue Manual defines working capital as current assets minus current liabilities and describes it as liquidity used in day-to-day operations. That tax-administration source supports the basic formula, while the practice's financial-reporting framework and CPA govern its statements.

Available cash is only part of the picture

Accounts receivable can make working capital positive even when payroll cash is tight. A receivable may be unbilled, held, rejected, denied, under appeal, patient responsibility, disputed, recouped, or unlikely to collect. Its net carrying amount should reflect the applicable accounting policy, but the cash forecast should also reflect expected timing and uncertainty.

Prepaid insurance may qualify as a current asset while remaining unavailable for payroll. Restricted cash can appear on the balance sheet yet be unusable for ordinary operations. On the liability side, an accrued payroll or payer refund can demand cash before receivables convert.

The SBA finance guide describes the balance sheet as a snapshot of assets, liabilities, and equity and recommends tracking receivables, payables, available cash, payroll, and bank reconciliation. Working capital begins with that reconciled snapshot. Liquidity decisions need the timing detail behind it.

Current ratio answers a related question

The current ratio is:

current assets ÷ current liabilities

Working capital reports a dollar difference. The current ratio reports a proportion. Two practices can have the same ratio and very different dollar cushions, while two practices with equal working capital can have different balance-sheet scale.

Neither measure proves solvency, profitability, service quality, or access to cash. Trends can change because of growth, debt reclassification, owner transactions, acquisitions, seasonality, write-offs, or accounting changes. Show the underlying dollars and explain material movements.

A fictional ABA practice example

A fictional practice closes June with these current assets:

• unrestricted and restricted cash: $240,000
• net accounts receivable: $510,000
• prepaid expenses: $30,000

Total current assets are $780,000. Current liabilities are:

• accounts payable: $95,000
• accrued payroll and payroll taxes: $160,000
• current debt: $45,000
• payer refunds and recoupments due: $25,000

Total current liabilities are $325,000. The working-capital calculation is:

$780,000 − $325,000 = $455,000

The current ratio is:

$780,000 ÷ $325,000 = 2.40

The practice then performs a separate management liquidity scenario. Of the reported cash, $40,000 is restricted. Of net receivables, $90,000 is over 120 days old and has not otherwise been excluded or reflected in the allowance. Removing both only for this labeled downside view gives:

$455,000 − $40,000 − $90,000 = $325,000 adjusted management view

That $325,000 is not the financial-statement working-capital balance. It is a scenario used to test liquidity quality. If the receivable allowance already reflects the $90,000 risk, subtracting it again would double count the concern.

Convert the snapshot into a timing forecast

List cash receipts and payments by week for the near term. Model payer and patient collections from observed claim cohorts, then schedule payroll, taxes, benefits, rent, vendors, refunds, debt, deposits, and capital commitments. The FDIC and SBA cash-flow guide treats projections as estimates that should be revisited as actual conditions change.

Keep payer adjudication and cash receipt separate. CMS remittance guidance explains that remittance advice reports claim results and adjustments, while payment may arrive by electronic funds transfer or check. Reconcile the deposit before counting available cash.

Useful companion views include cash runway, current ratio, aged receivables, days sales outstanding, net collection rate, accounts-payable aging, accrued payroll, debt covenants, and forecast minimum cash. Set an escalation threshold before a shortfall. Clinical leaders should review continuity, supervision, safety, and transition effects before financial actions change care delivery.

Set a board- or owner-approved minimum unrestricted-cash threshold and forecast the lowest weekly balance, not only the month-end result. Record the assumptions, payer cohorts, payroll dates, contingency actions, decision owner, and review cadence. Reconcile each forecast with actual deposits and payments so an improving working-capital snapshot does not hide a near-term cash trough.