The current ratio is one of

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So how do you determine the right level of working capital for your business To do this, you need to know more about your business environment. Empower your team. Lead the industry. Subscribe to a library of online courses and digital learning tools for your organization. Suppose you are running a business in the software sector that serves the service industry then the required level of working capital will be lower than for example a manufacturing company. The  inventory levels are low, and it will take less time to provide services and generate cash than it takes to produce and sell goods.

 

 

To find out the right amount of working capital you need, you'll need to look at a recent balance sheet and make the calculation considering current assets and Fax Lists current liabilities. Once you have found the working capital you need, you also need to know if the margin of safety is large enough to operate efficiently. To do this, you need to calculate the working capital ratio . Working Capital Ratio or Current Ratio Current Assets Current Liabilities   the current ratios that helps you measure a business' ability to meet short-term financial commitments when they come due. The higher the current ratio, the better the ability to meet short-term financial obligations. 

 

 

In other words, it means your business has enough current assets to cover your current liabilities. If you look at the wave of dividends paid by software giant Microsoft in 2010, you will understand that excess cash surplus is also an unmanageable situation. The company had long been generating cash at a rate of $100 million per month, and then, to everyone's surprise, on 2/2019, the company announced that it would be returning $100 million to shareholders in various forms. First, it paid a one-time dividend of $100 million, then it decided to buy back $100 million worth of stock over four years, and in a third step.

Edited July 19, 2023 by asim52