Working capital and liquidity ratios: practical guide

What to prepare

• Gather supplier quotes, invoices, time records and the actual scope of the job or business decision.
• Separate revenue from VAT, direct costs from overheads, and profit from the timing of cash receipts.
• Use the same accounting period and currency for related inputs.

Understand the inputs

The calculation method

Working capital = current assets − current liabilities; quick ratio includes only cash and receivables.

Worked example

Illustrative inputs and their result.

Example inputs

Cash (€)

40000

Trade receivables (€)

70000

Inventory (€)

90000

Other current assets (€)

5000

Current liabilities (€)

125000

Calculated example result

Net Working Capital

€80,000.00

Current Ratio

1.64×

Quick Ratio

0.88×

How to interpret the result

A profitable estimate can still create a cash shortfall. Read the cost and timing assumptions as well as the headline profit, price or return; the result is a scenario, not a sales forecast.

Keep the scope constant while changing price, volume, supplier cost or time. A lower-sales or higher-cost case helps show whether the decision depends on an optimistic assumption.

Common mistakes to avoid

• Do not confuse markup on cost with margin on selling price.
• Include work that is easy to miss, such as travel, setup, rework and administration, where the model supports it.
• Do not treat tax collected or an unpaid invoice as freely available cash.

Assumptions and sources

All balance-sheet values must be measured at the same date. Ratios cannot establish collectible quality.

Related business guides

• Margin & markup pricing: practical guide
• Cost of goods sold: practical guide
• Break-even analysis: practical guide
• Irish corporation tax: practical guide
• Customer acquisition & value: practical guide
• Stock turnover & DSO: practical guide