| Generally a working capital ratio
of 2:1 is regarded as desirable. However the circumstances
of every business vary and you should consider how your
business operates and set an appropriate benchmark ratio.
A stronger ratio indicates a better ability to meet
ongoing and unexpected bills therefore taking the pressure off your
cash flow. Being in a liquid position can also have
advantages such as being able to negotiate cash discounts
with your suppliers.
A weaker ratio may indicate that your business
is having greater difficulties meeting its short-term commitments
and that additional working capital support is required.
Having to pay bills before payments are received
may be the issue in which case an
overdraft could assist. Alternatively building up a reserve of cash
investments may create a sound working capital buffer.
Ratios should be considered over a period of time
(say three years), in order to identify trends in the performance
of the business.
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