Working Capital Analysis
Working capital is current assets minus current liabilities - the cash available for daily operations. With $200,000 current assets and $100,000 current liabilities, you have $100,000 working capital and 2.0 current ratio. Positive working capital means you can pay short-term obligations, essential for business survival and financial health.
Current ratio (current assets / current liabilities) measures liquidity. Ratio above 1.0 means you can cover short-term debts. 1.5-2.0 is healthy for most businesses. Below 1.0 signals potential cash flow problems. Above 3.0 might indicate inefficient use of assets - excess cash sitting idle instead of being invested in growth.
Improve working capital by accelerating receivables collection, extending payables terms, reducing inventory levels, improving sales to generate more cash, or securing a line of credit for flexibility. Monitor working capital monthly - declining trends warn of financial trouble before crisis hits. Strong working capital provides cushion for unexpected expenses or opportunities.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
1.5 to 2.0 is generally healthy. Below 1.0 means potential liquidity problems. Above 3.0 might indicate inefficient use of capital. Ideal ratio varies by industry - compare to industry benchmarks.
Yes, excessive working capital means cash sitting idle instead of being invested in growth, equipment, or earning returns. Balance liquidity needs with growth opportunities. Don't hoard cash unnecessarily.
Cash is one component of working capital. Working capital includes cash plus accounts receivable, inventory, and other current assets minus current liabilities. You can have positive working capital but low cash if funds are tied in inventory or receivables.