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.
– Liabilities = Working capital
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.
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.