Calculate your working capital
What is working capital?
Working capital (also called net current assets) is the difference between current assets (what the company has or will receive over the next 12 months) and current liabilities (what the company must pay over the next 12 months).
It is the financial "cushion" that protects a company from treasury crises. Positive working capital means the company can meet its short-term obligations with its short-term assets, without needing emergency financing.
Current Liquidity Ratio = Current Assets ÷ Current Liabilities
The current liquidity ratio turns this figure into a metric comparable across companies. A ratio of 1.5x means the company has €1.50 of current assets for every €1.00 of current liabilities.
The 3 liquidity ratios you should know
Financial analysts use three progressively stricter ratios to assess a company's liquidity:
| Ratio | Formula | Healthy benchmark | What it excludes |
|---|---|---|---|
| Current ratio | CA ÷ CL | ≥ 1.5x | — |
| Quick ratio | (CA − Inventory) ÷ CL | ≥ 1.0x | Inventory (less liquid) |
| Cash ratio | Cash ÷ CL | ≥ 0.2x | Everything except cash and equivalents |
The quick ratio is especially useful for companies with a lot of stock, because inventory can take weeks or months to convert into cash and should not be counted as immediate liquidity.
When negative working capital can be normal
Negative working capital is generally a warning sign, but there are important exceptions. Companies with upfront-payment business models (supermarkets, online retail, restaurants) get paid by the customer before paying the supplier.
In these cases, current liabilities include supplier debt that is not yet due, but the company already has the cash on hand (from its customers). The ratio looks weak, but the cash cycle is positive.
Rule of thumb: analyse working capital together with the cash conversion cycle (CCC = DSO + DIO − DPO). A negative CCC means the business model generates liquidity on its own, and negative working capital can be healthy in that context.
Warning signs on the balance sheet
These four balance-sheet patterns are often overlooked by SMEs, but they signal serious liquidity problems:
Current liabilities higher than current assets. The company does not have enough assets to cover its short-term obligations. Solution: factoring to turn invoices into immediate cash.
You get paid late but pay early, the worst-case scenario for treasury. Every month that passes increases the working-capital requirement. Optimise your DSO with invoice advances.
If most of your current assets are idle stock, real liquidity is far lower than the ratio suggests. Review your inventory policy and compare the current ratio against the quick ratio.
Bank loans maturing within the next 12 months drastically increase current liabilities. Renegotiate terms or refinance before treasury pressure sets in.
Frequently asked questions
Improve your working capital with factoring
Turn invoices into cash in 24-48 hours. Factoring is the most direct way to improve working capital without resorting to traditional bank credit.