A company’s working capital is defined as its current assets minus current liabilities.
Current assets are cash, short-term receivables, trade debtors, inventory and other assets and claims on assets that are expected to convert into cash within a year.
Current liabilities are short-term debts such as trade creditors, accounts payable, accrued liabilities and other liabilities that are to be paid off within one year.
While assessing a company’s creditworthiness, banks also investigate the firm’s working capital ratio, or current ratio, which is defined as the ratio between the company’s current assets and current liabilities. While a relatively low current ratio indicates that the company is highly indebted, (a ratio lower than 1 indicates that the company’s current liabilities exceed its current assets). A relatively high current ratio denotes ineffective management, as this may imply that the company is not investing its excess cash or has too much inventory.
We at MPG can assist you with your working capital financing requirements, which will give your business a boost for handling daily operations as well as pursuing long-term objectives.