What is Working Capital? Working capital (Current Assets - Current Liabilities) measures a company's short-term liquidity and operational efficiency. Positive working capital means a company can fund day-to-day operations and invest in growth.
Ideal Current Ratio (1.5 - 2.0): A ratio below 1.0 signals potential liquidity trouble; above 2.0 may mean assets are not being used efficiently. The sweet spot is generally between 1.5 and 2.0.
Quick Ratio Significance: Also called the Acid-Test Ratio, it excludes inventory from current assets. A quick ratio above 1.0 indicates the company can meet obligations without relying on selling inventory.
Tips to Improve Working Capital: Negotiate longer payment terms with suppliers, speed up receivable collections, reduce excess inventory, and use short-term credit lines wisely.
Working Capital Financing: Options include cash credit, overdraft facility, bill discounting, factoring, channel financing, and short-term business loans from banks and NBFCs.
Industry Benchmarks: Manufacturing (1.5-2.0x), IT Services (2.0-3.0x), Retail (1.2-1.5x), Construction (1.2-1.8x). Cash conversion cycles vary widely across sectors.