Development

What is the working capital ratio and how is it calculated?

In a company, business people certainly need a working capital ratio to finance the company’s operations. To find out how healthy the business conditions have been, you need to know about the working capital ratio in your company.

In this article, I will describe the definition of the working capital ratio or what is commonly called the liquidity ratio, the types of ratios, why the working capital ratio is important, how to calculate it and what to do with this information.

Definition of Working Capital Ratio

By definition, the working capital ratio is a description of the short-term financial position in the form of a measure of the smooth operation of a company in one year.

In every business process, companies need working capital in the form of cash or non-cash assets that can be disbursed to finance the company’s operations.

Working capital is often known as the company’s current assets in financial statements. The assets are managed to generate regular company income.

In essence, the company must have current estimates and assets to finance operational needs for the smooth running of business processes.

In the financial statements, the operational needs or routine expenses are presented as current debt. Current assets must be able to pay the company’s current debt. If not, it indicates the company’s routine business processes are stuck.

The working capital requirements of each company certainly vary depending on the type of business. A retail company, for example, needs funds to buy and store merchandise, pay employee salaries, and other sales operating expenses.

Manufacturing companies need funds to buy raw materials, employee salaries, and production expenses, administrative expenses, and other expenses.

By comparing the value of current assets and current debt, it can be estimated the smooth operation of the company. The ratio of current assets and current debt is called the working capital ratio.

Compiling data on current assets and current debt will be easier if you use lcs2 (Lead Conversion Squared) software. With the financial statement feature, especially the balance sheet on lcs2, you no longer need to collect current assets and current debt data manually, but online and can be monitored in real-time.

Reasons for Important Working Capital Ratio

This ratio is very important to know the condition of the company. The reason is that this ratio can provide an overview of the short-term financial position so that it helps companies evaluate and monitor how much efficiency of working capital is carried out within a certain period.

Business owners, accountants, investors, and other economic actors use the liquidity ratio to calculate the working capital or financial assets available in a company.

It can be said, this is an indication that can be used to measure the company’s ability to handle its short-term financial obligations, such as paying employee salaries, paying debts, and other obligations.

Especially for business actors, in other words, the liquidity ratio is important to become a barometer for the company’s financial health. This ratio can also help predict impending cash flow problems and even signal bankruptcy which is very important in today’s economy.

For creditors, in other words, the liquidity ratio can be a reference to determine prospects related to dividends and the company’s ability to pay debt interest costs in the future.