Your working capital ratio is a classic indicator of general liquidity that is widely used in financial analyses and diagnoses. It is calculated by subtracting current liabilities from current assets. A positive result means that the business can pay its short-term debts, take advantage of business opportunities and get good credit terms.
Businesses operate better when their working capital is well managed. This includes collecting on accounts receivable, rotating inventory and paying suppliers with suitable and strategic frequency.
Diane Nieminen
Analyst-Researcher
DE – CLDG
“Many entrepreneurs incorrectly believe that as long as they generate earnings they are protected from liquidity problems. In fact, working capital can be significantly affected in different ways. For instance, it is sometimes better to finance capital purchases over the longer term than to pay cash for them. This helps maintain liquidity for operating expenses.”
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Pratical Information
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Plan your liquidity requirements
Using your bank balance as a starting point, note the projected monthly debits and credits. This will help you assess your needs at different times and take the appropriate steps.
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Manage your client accounts efficiently
Send in your invoices on time and be diligent about collecting from your clients. As well, diversify your clients to avoid depending on only one, who might run into financial problems.
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Avoid unnecessary expenses
Re-assess your operations so that you can improve your business’ productivity and profitability.
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Be sure to rotate your inventory
The longer your inventory remains in your warehouse or on your shelves, the more it costs. Liquidate any merchandise that is selling more slowly by marking it down, and assess the level of inventory you need for your operations in order to avoid tying up funds in unproductive ways.
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Negotiate good terms with your suppliers
Negotiate good prices and payment terms that serve your needs.
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