Know Your AR Metrics: Working Capital Balance and Quick Ratio - Funding Gates Blog
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Know Your AR Metrics: Working Capital Balance and Quick Ratio

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If you don’t know where you’re going, you’ll probably end up going somewhere else. – Yogi Berra

Many businesses are great at what they do…Until it’s time to get paid.

Despite the fact that critical cash flow is a major factor when evaluating the health of small companies and larger enterprises alike, most businesses lack an efficient method by which to track and collect payments from customers. Juggling an onslaught of invoices often gets pushed to the bottom of a to-do list amid servicing clients and gaining new business.

A whopping 50% of companies struggle with collecting accounts receivable (AR) payments, putting a business’ lifeblood in jeopardy if not handled properly.

But before hounding your delinquent clients’ phones and inboxes, there are a handful of metrics that can help you better monitor the entire accounts receivable performance. A few of these tools are integral in getting a panoramic snapshot of the state of your cash flow. Working capital balance and quick ratio are two of them.

Working capital

is essentially the money that’s needed to fund the day-to-day operations of a business. It’s defined as the difference between current assets (i.e., cash, short-term investments, accounts receivable, and stock inventory) and current liabilities (i.e., anything that must be paid off within the operating cycle of a given firm, such as accrued royalties, accounts payable and other expenses).

Working Capital Balance = Current Assets – Current Liabilities

It’s helpful to plot working capital over time in order to find any glaring decreases, and ultimately bring that to your clients’ attention.

The “

quick ratio

” measures the business’ capability to cover current liabilities with the most liquid current assets.

Quick Ratio = (Current Assets – Inventory) / Current Liabilities

The optimal quick ratio is 1:1 or higher. It translates to: You can relax, your expenses are covered. It’s a conservative overview, as it doesn’t include inventory and other current assets. A ratio of less than 1 indicates: Get the client on the phone, now. It’s a bad sign for potential investors and partners.

Considering that an average of 20% of a business’ AR is delinquent, this lag can greatly affect your company’s liquidity—and ultimately, your working capital.

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