Calculate working capital and liquidity ratios - Current Assets minus Current Liabilities with Current Ratio, Quick Ratio, Cash Ratio analysis. Includes working capital turnover, days working capital, industry benchmarks comparison, and cash conversion cycle optimization for business financial health assessment.
Frequently Asked Questions
What is working capital and why is it important?
Working Capital = Current Assets - Current Liabilities.
Measures short-term financial health and ability to cover operational expenses.
Positive = good (can pay bills), negative = risk (liquidity crisis).
Example: $500k current assets (cash $100k, receivables $200k, inventory $200k) - $300k current liabilities (payables $200k, short-term debt $100k) = $200k working capital.
Importance: (1) Operations - fund day-to-day expenses without borrowing, (2) Growth - finance expansion without external capital, (3) Emergencies - buffer for unexpected costs, (4) Creditworthiness - lenders assess ability to repay.
Optimal range: 1.2-2.0 current ratio (too low = risk, too high = inefficient capital use).
What is a good current ratio and quick ratio?
Current Ratio = Current Assets ÷ Current Liabilities.
Ideal: 1.5-3.0 (varies by industry).
Below 1.0 = cannot cover short-term obligations.
Above 3.0 = excess cash (underutilized assets).
Quick Ratio (Acid Test) = (Current Assets - Inventory) ÷ Current Liabilities.
More conservative (excludes inventory = hardest to liquidate).
Ideal: 1.0-1.5.
Below 1.0 = may struggle to pay bills if inventory doesn't sell quickly.
Industry benchmarks (2025): Retail 1.2-1.8 (lower OK, fast inventory turnover), Manufacturing 1.5-2.5 (higher needed, slow inventory), Tech/SaaS 2.0-5.0 (high cash, minimal inventory).
Example: $500k assets ($200k inventory) - $300k liabilities = 1.67 current ratio, 1.0 quick ratio = Healthy for retail, risky for manufacturing.
How much working capital does my business need?
Calculate based on Operating Cycle + Safety Buffer.
Formula: (Average Daily Operating Expenses) × (Cash Conversion Cycle Days) + 20-30% buffer.
Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding - Days Payables Outstanding.
Example: Manufacturing company - Revenue $5M/year, COGS $3M, Operating expenses $1.5M.
Daily operating cost = $4.5M ÷ 365 = $12,329.
Cash cycle = 60 days inventory + 45 days receivables - 30 days payables = 75 days.
Working capital needed = $12,329 × 75 = $924,675 + 25% buffer = $1,155,844.
Alternative quick estimate: 10-20% of annual revenue. $5M revenue × 15% = $750k (conservative for stable business).
Higher needs: Seasonal businesses (40-60% revenue), fast growth (30-50%), low margins (20-30%).
What causes negative working capital and is it always bad?
Causes: (1) Operating losses - expenses exceed revenue, (2) Excessive debt - too much short-term borrowing, (3) Slow collections - customers not paying on time, (4) Excess inventory - cash tied up in unsold goods, (5) Rapid growth - expanding faster than cash flow supports.
Not always bad: Negative working capital acceptable for: (1) Fast inventory turnover businesses (Costco, Amazon) - collect from customers before paying suppliers, (2) Subscription/SaaS - upfront payments (deferred revenue liability) but low costs, (3) Retail (Walmart) - 5-7 day inventory turnover, 30-60 day payment terms = cash float.
Example: Grocery store - Sells inventory in 7 days, pays suppliers in 30 days = 23-day cash float, no need for working capital loan.
Red flags: Negative working capital + slow inventory turnover (>60 days) + increasing payables = insolvency risk.
How do I improve my working capital position?
5 strategies (fastest impact): (1) Speed up collections - Offer 2% discount for 10-day payment (2/10 net 30), use automated invoicing, follow up on overdue accounts.
Impact: Reduce DSO 45→30 days = 15 days × $12k daily revenue = $180k freed up. (2) Negotiate payment terms - Extend payables 30→45 days without damaging vendor relationships.
Impact: 15 days × $8k daily COGS = $120k cash retained. (3) Reduce inventory - Implement Just-In-Time, liquidate slow-moving stock.
Impact: $200k inventory × 25% reduction = $50k freed up. (4) Short-term financing - Line of credit, invoice factoring (1-3% fee but immediate cash). (5) Increase profitability - Raise prices 5-10%, cut unnecessary expenses.
Avoid: Fire sales (destroys brand value), late payments (damages credit).
Best: Combine #1 + #2 = $300k improvement without external financing.
What is working capital turnover and what does it mean?
Working Capital Turnover = Revenue ÷ Average Working Capital.
Measures how efficiently working capital generates sales.
Higher = better (more sales per dollar of working capital).
Benchmarks: <1.0 = Poor (too much capital tied up, underutilized assets). 1.0-2.0 = Adequate (typical for capital-intensive businesses). 2.0-5.0 = Good (efficient capital use, common in retail/services). >5.0 = Excellent or risky (very efficient or insufficient working capital buffer).
Example: $5M revenue ÷ $1M working capital = 5.0 turnover.
Interpretation: Each $1 working capital generates $5 revenue.
Industry comparison: Grocery stores 10-20 (fast turnover, thin margins), Manufacturing 2-5 (slower turnover, inventory intensive), SaaS 8-15 (minimal inventory, high margins).
Warning: Very high turnover (>10) + negative working capital = liquidity crisis if sales slow.
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- Author: SuperCalc Editorial Team
- Reviewed: SuperCalc Editors (clarity & accuracy)
- Last updated: 2026-01-13
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Financial/Tax Disclaimer
This tool does not provide financial, investment, or tax advice. Calculations are estimates and may not reflect your specific situation. Consider consulting a licensed professional before making decisions.