Working capital is a useful way of establishing a company’s financial health. Essentially a ratio between an organization’s assets and its liabilities, it can be used to assess how efficiently that business operates and whether it is an attractive proposition for investment.
A healthy working capital ratio is traditionally anywhere between 1.2 and 2.0. Anything below 1.2 indicates negative working capital, and suggests that a company may have difficulties with liquidity. A ratio above 2.0 suggests that a company is not making the best use of its assets and is therefore operating inefficiently.
As part of a Supply Chain Finance strategy, having access to working capital is a good way for a company to improve its relationship with both buyers and suppliers. It gives a company the ability to pay suppliers before it has received payment owed from buyers, meaning it can be more flexible and adaptable to unexpected shifts in the market.
By using working capital to improve their business’s cash flow, treasurers can reduce their exposure to risk and free up cash that would otherwise be trapped in the financial supply chain.
Understanding working capital, and using it effectively, can lead to a virtuous cycle that benefits your business, your buyers, your suppliers and your customers.