3 Types of Working Capital Management Ratios

If you’re a business owner who wants to learn more about the business strategy that can help you make sure that your company is operating as efficiently as possible, you need to talk to seasoned capital management financial advisors. Without working capital management, your company may struggle to maintain enough cash flow that could cover your short-term operating costs, as well as your short-term debt obligations.

What are the 3 Different Types of Working Capital Ratios?

Current Ratio

Also called the working capital ratio, serves as one of the main indicators of an organization’s financial state because it determines its capacity to address its short-term financial obligations. If the company’s current ratio is below 1.0, this means that it’s far from being financially healthy. This also means that the organization fails to meet its short-term obligations and its liquid assets aren’t enough to cover its debts in the following year. This would require the company to secure long-term debt, sell off its assets, or look into other financing alternatives in order to cover its financial obligations. While a company that has a current ratio of 1.2 to 2.0 is considered to be financially stable, one that has a current ratio that’s higher than 2.0 fails to use its assets to boost its revenues.

Collection Ratio

This measures the efficiency of a company’s accounts receivables management. It determines the average number of days that it would take for a company to get paid after a sales transaction on credit takes place. The lower the collection ratio is, the more efficient the company’s cash flow is.

Inventory Turnover Ratio

This determines a company’s efficiency in terms of selling and replenishing its inventory. A low inventory turnover ratio means that the company’s inventory levels are excessive. While a high inventory turnover ratio means that its inventory levels are not enough.

Looking for Capital Management Financial Advisors?

If you want more information about working capital ratios, schedule an appointment with the experts at 1879 Advisors today.

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