![]() Current liabilities entail any expenses your business expects to pay off within a year, such as accounts payable, short-term loans, and current portions of long-term debt. For example, if a company has $100,000 in current assets and $50,000 in current liabilities, the working capital ratio would be 2:1.Ĭurrent assets include anything that your company expects to convert into cash or use up within a year, such as cash, accounts receivable, inventory, and short-term investments. ![]() The resulting ratio represents the number of times that your company’s current assets can cover its current liabilities. The working capital ratio is calculated by dividing a company’s current assets by its current liabilities. ![]() A company with positive working capital is not only more likely to withstand financial obstacles, but also have more flexibility to invest in growth once short-term obligations are met. It focuses on the short-term financial obligations in contrast with longer-term investments, such as fixed assets or research and development costs. Working capital ratio, also known as current ratio, is a financial metric that measures a company’s ability to pay its short-term liabilities using its short-term assets. Generally, the two metrics given most importance are cash flow and working capital, the latter of which will be addressed below. As a business owner, it’s important to consistently be aware of metrics that determine the likelihood of your company’s ability to meet its financial obligations, weather an unexpected downturn, or handle a crisis.
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