Does your Business Have Sufficient Working Capital?
You have to interpret both those numbers. Do you know how to do this? If not, below is a brief guide to help you out with it.
If your working capital ratio is below 1, then it means that you have negative WC. A ratio of 1 and above, in contrast, means you have positive net working capital (NWC).
Having sufficient working capital is an ideal situation for any business. A working capital ratio that falls anywhere between 1.20 and 2.0 is a positive sign. If it is less than that, you do not have enough funds to meet your operational expenses. If it is more than that, you are not investing wisely and properly in your business’s expansion.
An insufficient working capital amount shows red flags on the operations of your company. For example, you may find that said insufficiency is an outcome of declining sales. If your sales are becoming fewer and fewer, you will not have much to collect from your debtors and will have a smaller pool of working capital remaining for business use.
While calculating, pay attention to the kinds of liabilities and assets your business has. If too much cash is tied up in invoices or inventory, for example, then that can hurt its working capital position.