Working capital
Lesson 5 of 13 in our free Business Money Advanced guide: a 5-minute money game with the key points below.
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Questions you'll answer
Illustration: Kettle & Co has cash £18,000, stock £7,000 and customers owing £5,000. It owes suppliers £12,000, VAT £6,000 and £6,000 of loan due this year. What's its working capital?
Same figures: current assets £30,000, current liabilities £24,000. What's the current ratio?
The quick ratio is like the current ratio but leaves out stock. Why leave out stock?
Quick facts
- Chasing the catering clients who pay late → Improves it. Debts turn into cash sooner.
- Buying six months of coffee beans at once with cash → Makes it worse. Cash gets locked up in stock that sits on a shelf.
- Agreeing 30-day payment terms with a supplier instead of paying up front → Improves it. Cash stays in the business for longer, as long as the bills are paid on time.
- Paying for a new shop fit-out from the cash buffer → Makes it worse. Cash becomes a long-term asset, so the short-term cushion shrinks.