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Working capital (W.C.) is a financial ratio that represents the operating liquidity of a business and funds available to a business; generally a working capital ratio of 2:1 is desirable. The W.C. ratio is calculated as current asserts minus current liabilities. If the asserts are less than the liabilities then this is WC deficit and if the assert are greater than the liabilities this is the W.C. deficit.

Asserts – Liabilities = Working capital

A stronger ratio indicates a better ability to meet ongoing and unexpected bills therefore taking the pressure off your cash flow. Being in a strong liquidity position can also have advantages such as being able to hold more stock , purchase and negotiate cash discounts with your suppliers and the ability to invest in the growth of the business.

A poor working capital ratio may indicate that your business is having greater difficulties meeting its short-term commitments and that additional working capital support is required. Having to pay bills before payments are received may be the issue in which case a line of credit , overdraft or extended credit with key suppliers maybe required.

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