Managing working capital is one of the most important ways to keep your business moving, while the working capital ratio is a key metric for understanding your ability to operate efficiently and meet your financial obligations. 

In this guide, we explain how the working capital ratio is calculated and what it represents, plus how to interpret it and manage your working capital effectively.

What is the working capital ratio?

The working capital ratio, also known as the current ratio or net working capital ratio, is a financial metric that indicates a company's ability to cover its short-term obligations with its short-term assets. Beyond this simple definition, ask yourself the question: Can you pay your bills and upcoming costs with the assets you have over a certain period? 

The working capital ratio is an important metric for businesses, as it helps you see how well you’re using liquidity and whether your operations are efficient. Your working capital ratio calculation will give you either a positive or a negative ratio.

Why the working capital ratio matters

While it’s not the complete picture, your working capital ratio is a useful indicator of financial health. Cash flow gaps are a common issue for small businesses and a key factor for many companies going out of business. According to Equifax, 82% of business failures are due to poor cash flow management. 

The working capital ratio gives a snapshot of your financial health at a certain time. It can help you see whether your business is in a position to pay necessary operational costs, such as rent, utilities, payroll, supplier payments, etc., with the revenue and assets you have available. 

If you have a negative ratio, you can take steps to address issues and influencing factors, including renegotiating terms, increasing product/service prices, improving credit control and inventory management, or even taking out a working capital loan.

Be aware, too, that an overly high working capital ratio can also be an issue, as it can mean you’re underinvesting in growth or have too many assets tied up (in inventory or receivables) and not available for operational expenditure. 

How do you calculate the working capital ratio?

To calculate your working capital ratio, you must divide your assets by your liabilities. So, the simple working capital ratio formula is as follows:

Working capital ratio = Current assets ÷ current liabilities

So, with this working capital ratio formula, you divide your current assets by your current liabilities. 

Current assets include:

• Cash
• Accounts receivable
• Inventory
• Any other assets that can be converted into cash within a year

Current liabilities are short-term obligations that are due within a year, such as:

• Accounts payable (money owed)
• Short-term debt
• Tax owed within a year
• Salaries and wages

An example of how to calculate working capital ratio 

Consider a small business that wants to work out its working capital ratio with these example financials:

Current assets:

• Cash: £30,000
• Accounts receivable: £40,000
• Inventory: £20,000
• Prepaid expenses: £10,000

Total current assets = £100,000

Current Liabilities:

• Accounts payable: £20,000
• Short-term debt: £15,000
• Accrued liabilities: £10,000
• Taxes payable: £5,000

Total current liabilities = £50,000

The working capital ratio would be:

£100,000/ £50,000 = 2.0

A ratio of 2.0 indicates that the business has twice as many current assets as current liabilities, suggesting a healthy liquidity position.

Working capital ratio vs working capital (and cash flow)

The working capital ratio (or current ratio) and working capital both assess short-term liquidity, but in different forms. The ratio compares current assets to current liabilities, giving a proportional view of how easily a UK business can meet short-term obligations. Working capital (current assets minus current liabilities) shows the actual funds available for day-to-day operations.

Cash flow differs because it tracks the movement of money over time rather than providing a static snapshot. You may have a positive working capital ratio but still have cash flow issues, due to late payments or slow turnover of inventory, for example. Cash flow reflects your real-time financial health and operational efficiency, while the ratio and working capital indicate your solvency level at a specific time.

Learn more about the close relationship between working capital and cash flow in our article: Working Capital and Cash Flow: How They Work Together.

Metrics associated with the working capital ratio

There are various metrics closely linked to the working capital ratio, which offer different perspectives to help businesses understand the key factors at play.

Here are other ratio-based metrics to consider and track as you aim to improve working capital management:

• Working capital turnover ratio: Shows how efficiently a business uses its working capital to generate revenue, unlike the working capital ratio, which measures short-term liquidity.
• Working capital to sales ratio: Indicates the proportion of sales tied up in working capital, as opposed to the working capital ratio’s focus on asset and liability balance.
• Working capital cycle ratio: Measures the time it takes to convert inventory and receivables into cash.
• Working capital to total assets ratio: Highlights how much of your total assets are funded by working capital.

For more insights into other working capital metrics, strategies and finance support, explore our working capital resource hub.

What is a good working capital ratio?

A working capital ratio between 1.2 and 2.0 is generally considered good. Ratios below 1.0 indicate potential liquidity problems, as the business may struggle to meet its short-term obligations. However, a ratio significantly higher than 2.0 might suggest that your business isn’t using its assets efficiently to generate growth, leaving too much liquidity unused.

The ideal working capital ratio differs per industry and business size. For example, sectors and companies with longer operational cycles may require higher ratios to ensure they can cover their longer cash conversion cycles.

Benchmarking the working capital ratio in your industry

Benchmarking working capital ratios is vital because it helps a business understand whether its liquidity and short-term financial health are in line with what’s normal for its sector. Comparing your working capital ratio (or net working capital) against industry peers and competitors enables you to judge how well you’re doing and spot areas for improvement.

As mentioned, a working capital ratio of between 1.2 and 2 is widely regarded as a good range, but optimum working capital ratios can vary by sector. In retail, for example, average working capital ratios are typically lower than in most sectors, due to high inventory turnover. In fact, recent data from CSI Market showed retail working capital ratios teetering just above 1 throughout 2025. 

Meanwhile, in sectors like manufacturing and construction, averages are often higher due to factors like requiring high-value assets and materials ahead of projects and production getting underway. The same source of figures shows UK manufacturing working capital ratio averages in 2025 ranging from 1.70 to 1.85.

Why is the average working capital ratio in some industries higher than in others?

Sectors like manufacturing and construction have higher working capital ratios because they must fund materials, labour needs and work-in-progress far in advance of getting paid. Construction projects often have long timelines, with staggered payments, while manufacturing firms hold raw materials and finished goods, which increase their current assets in comparison to short-term liabilities.

Elsewhere, retail and professional services, for example, have significantly lower working capital ratios. Retailers turn over stock quickly and, in most cases, receive instant customer payments, while professional services providers often hold minimal inventory and convert work to cash faster than in many other sectors.

Common mistakes in assessing the working capital ratio (and how to avoid them)

While the working capital ratio might seem like a fairly simple metric, there are numerous factors at play, and you need to dig deeper into the data and associated metrics to understand your genuine working capital health and what is influencing rates. But many businesses overlook key details or misinterpret the data.

Here are the main mistakes to avoid when assessing your working capital ratio:

• Assuming a positive working capital ratio guarantees good cash flow: A working capital ratio above 1 simply means current assets exceed current liabilities, but those assets could be tied up in slow-moving stock or overdue receivables, so a positive ratio doesn’t naturally mean you’re in great shape when it comes to cash flow.
• Ignoring industry benchmarks: As mentioned, optimal ratios vary by sector. So, just looking at your own ratio in isolation isn’t enough. Always benchmark against industry norms to ensure you’re on the right track.
• Not monitoring the ratio often enough: Working capital ratios fluctuate across the fiscal year due to seasonality, economic conditions, project cycles and various other factors. So, just taking a snapshot from time to time can be misleading. Ensure you track your ratio regulator and analyse patterns, identify trends and see where operations can be improved.
• Misinterpreting the ratio: A good working capital ratio can hide underlying issues, from holding too much stock to extended customer credit terms. You need to pinpoint and assess what’s influencing a positive or negative ratio. Also, use the ratio alongside key metrics to get the full picture.

Proven tactics for improving your working capital ratio

A negative working capital ratio is a red flag that indicates an imbalance between current assets and liabilities, while an overly positive ratio points to other issues with your working capital balance. However, it can regularly fluctuate, and there are various ways to address issues and improve your ratio.

Here are some proven tactics to consider: 

1. Accelerate your receivables: If you’re waiting too long to get paid, you can enforce stricter credit policies, improve payment follow-ups or get an advance through facilities like invoice financing.
2. Renegotiating terms and extending payables: On the flip side, you can seek longer terms to pay suppliers through trade credit agreements. Building strong supplier relationships is crucial to getting better terms.
3. Make the most of your inventory: Unsold inventory limits your working capital flexibility. To avoid overstocking, invest in smart inventory management systems and forecasting tools, utilise the JIT (just-in-time) methods, determine how long you hold onto products and conduct robust demand planning.
4. Leveraging working capital finance: Beyond invoice finance, there are other working capital finance solutions, like lines of credit, flexible business loans and merchant cash advances, which offer short-term access to funds to manage cash flow and keep a healthy working capital ratio.

Managing your working capital smarter with iwoca

If you’re looking to improve working capital health and increase operational efficiency, a business loan from iwoca can support your efforts. We provide fast access to funds with tailored repayments to help businesses ease cash flow, spread the cost of key asset purchases, invest in growth and cover unexpected expenses. 

iwoca’s flexible business financing solutions can help you maintain a healthy working capital ratio and take actions to improve internal processes. Here are some key benefits of our Flexi-Loans:

• You can apply for a loan online in minutes and get a decision within 24 hours.
• Borrow between £1,000 and £1 million for a matter of days, weeks or as much as 60 months, only paying interest on the money you use.
• Our process is designed to be hassle-free, with no paperwork or collateral.
• Once approved, you can start drawing down the funds you need.

Apply for an iwoca loan today or use our business loan calculator to get an idea of what your repayments will look like.

‍