Enter current assets and current liabilities, or build them from cash, receivables, inventory and payables. You get working capital, the current ratio, the quick ratio, and how many days of operating costs it covers.
Current means due or convertible within roughly a year. Working capital is the cushion between the money arriving soon and the money leaving soon, and the ratios describe how thick that cushion is relative to what it has to absorb.
The current ratio counts inventory as if it were almost cash. For many businesses that is optimistic. Stock has to be sold, at a price someone will pay, before it can settle a bill, and the inventory turnover calculator shows how long that takes.
The quick ratio removes inventory and asks whether the business could meet its short-term obligations from cash and receivables alone. In the worked example the current ratio is a comfortable 2.52. The quick ratio is 1.56. Still fine, but the difference is $18,802 of goods, which is the part of working capital most likely to be worth less than its book value in a hurry.
For a business carrying slow or seasonal stock, the quick ratio is the honest one. For a business that turns inventory weekly, the two converge and the distinction matters less.
| Current ratio | Usual reading |
|---|---|
| Below 1.0 | Short-term obligations exceed short-term assets. Needs attention |
| 1.0 to 1.5 | Tight. Workable if cash converts quickly |
| 1.5 to 3.0 | Comfortable for most trading businesses |
| Above 3.0 | Safe, but possibly idle cash or excess stock |
High is not automatically good. A ratio of four usually means cash sitting unused or inventory that is not moving, and both are money that could be working elsewhere, including in customer acquisition.
The exception to the low-ratio warning is any business paid before it pays. A retailer that takes card payments on the day and pays suppliers on sixty day terms can run a current ratio below one indefinitely, because its suppliers are effectively financing it.
Advertising is paid now and returns later. A campaign that spends $10,000 this month produces orders that may not settle for days, whose stock was bought weeks earlier, and whose customers may pay on terms. The gap between those outflows and inflows has to be funded from somewhere, and working capital is where it comes from.
This is how a profitable business runs out of money while growing. Each extra order requires stock bought in advance and ad spend paid up front, so faster growth consumes more working capital even when every order is profitable. The burn rate calculator shows the same effect from the cash side.
Before scaling spend, check how many days of operating costs your working capital covers. In the example it is 26, and 21 from cash alone. Doubling the ad budget does not double that cushion. It shortens it.
Growth consumes working capital. A business can be profitable on every order and still run out of money.
The first trap is the snapshot. Working capital is measured at one date and can look very different a week later. A large supplier payment due on the second of the month makes a balance sheet dated the first look healthier than the business is. Measure at several points, especially just after major outflows.
The second is receivables that will not be collected. A customer ninety days overdue is still counted in current assets. If it will not pay, working capital is overstated by exactly that amount. Age your receivables and discount anything doubtful.
The third is inventory at cost when it will not sell at cost. Stock carried at what you paid is only worth that if it sells for at least that. Obsolete or out-of-season stock should be valued at what it will actually fetch, which may be close to nothing.
The last is treating a strong ratio as permission to spend. Working capital is what pays next month’s bills. It is not profit, and spending it on growth works only if the growth returns the cash before the bills arrive.
Between about 1.5 and 3 is comfortable for most trading businesses. Below 1 means short-term bills exceed short-term assets, although businesses paid before they pay suppliers can run below 1 safely.
The quick ratio excludes inventory, asking whether the business could meet short-term obligations from cash and receivables alone. It is the more honest measure when stock is slow or seasonal.
Yes, and growing businesses often do. Each extra order needs stock bought and advertising paid in advance, so faster growth consumes working capital even when every sale is profitable.
No. A very high ratio usually means idle cash or stock that is not moving, both of which could be earning a return elsewhere.
We use Google Analytics to count visits, only if you allow it. Nothing you type into a calculator is ever sent. Privacy policy