Working capital ratio
Also called: current ratio
Working capital ratio is current assets divided by current liabilities, showing whether a business can cover its short term obligations.
The working capital ratio compares what a business owns that can turn into cash within a year against what it owes within that same year. You divide current assets, such as cash, accounts receivable, and inventory, by current liabilities like accounts payable and the current portion of debt. A result above 1 means current assets exceed current bills, which suggests the business can meet its near term obligations. A result below 1 means short term debts outweigh liquid assets, a sign that money could get tight.
When you seek financing, a lender uses this ratio to gauge short term financial health and the cushion you carry. A comfortable ratio, often somewhere between 1.5 and 2 depending on the industry, signals you have breathing room to absorb a new payment. A very low ratio may push a lender toward a smaller offer or a product built for short term gaps, such as a line of credit or working capital financing. A very high ratio is not always ideal either, since it can mean idle cash or slow moving inventory that could be put to better use.
Common questions
What is a good working capital ratio for a loan application?
Many lenders like to see a ratio of at least 1.2 to 2, meaning your short term assets comfortably exceed your short term debts. The right target varies by industry, since a restaurant carries different inventory and payment patterns than a wholesaler. A ratio under 1 does not rule out financing, but expect more questions about how you manage day to day cash.
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