Working capital is the difference between current assets and current liabilities. It represents the net liquid resources a business has available to fund day-to-day operations. Positive working capital means you can cover short-term obligations; negative working capital signals potential cash flow problems.
What is a healthy current ratio?
A current ratio between 1.5 and 2.0 is generally considered healthy. Below 1.0 means current liabilities exceed current assets, which can signal insolvency risk. Above 3.0 may indicate excess idle cash that could be deployed more productively.
What is the difference between current ratio and quick ratio?
The current ratio includes all current assets (including inventory and prepaid expenses). The quick ratio excludes inventory and prepaid expenses, measuring only the most liquid assets. The quick ratio is a more conservative liquidity test, especially for businesses with slow-moving inventory.
How do lenders use working capital?
Banks and lenders analyze working capital as part of credit underwriting. Many loan covenants require a minimum current ratio (often 1.25x or higher). Working capital is also used to determine how much of a revolving credit facility a business qualifies for.