Author: Dana Krook

Imagine your business is booming. Demand is high and revenue looks great on paper. But when it comes time to pay vendors, cover payroll or invest in growth, you’re scrambling to find the cash. Sound familiar? Welcome to the world of cash flow.

Cash flow isn’t just about how much money your business makes. Timing is critical, too. You’ve got to know when the money is due to arrive and whether it’ll be there when you need it. A profitable business can still find itself in financial trouble if cash flow isn’t properly managed. 

So, what is cash flow in a business? In this 2025 guide, we’ll break down why business cash flow matters, common pitfalls that trip companies up and actionable strategies to keep your finances in the green. Whether you’re an entrepreneur looking to scale or a seasoned business owner fine-tuning your financial strategy, this is your go-to guide for discovering it all.

What is cash flow in a business?

Simply put, cash flow is the money flowing in from customers, sales or funding, and the money flowing out to pay employees, cover expenses and invest in growth. We know from recent spend trend data that highly profitable companies dedicate a large portion of their spending to growth measures like digital marketing, so keeping an eye on your cash flow is key to sustainable growth. 

Well-managed cash flow ensures that your business has the liquidity to meet financial obligations, capitalize on new opportunities and maintain stability—even in times of uncertainty. Understanding and optimizing cash flow is essential for long-term success. Even profitable businesses can struggle if they don’t have cash available when they need it. 

Managing cash flow also means keeping a close eye on your working capital, which is the balance between your short-term assets and liabilities. This is what gives your business flexibility to operate, pay suppliers on time and take advantage of new opportunities.

Incoming vs. outgoing cash flow

Business cash flow can be broken down into incoming cash flow (money flowing into the business) and outgoing cash flow (money leaving the business).

Incoming cash flow includes things like customer payments, loan proceeds, investor funding and revenue from selling assets.

Outgoing cash flow covers rent, payroll, supplier payments, taxes, debt repayments, operational costs and other expenses.

Positive vs. negative cash flow

Positive cash flow means more money is coming in than going out. This allows for reinvestment into your business, savings and financial flexibility. 

Negative cash flow happens when expenses exceed income, leaving a business struggling to meet obligations. While occasional negative cash flow may not be a red flag, consistent shortfalls signal potential trouble. Think of it like a leaky bucket: sooner or later, you’ll run dry unless you patch the problem.

Types of cash flow

Cash flow breaks down into three main categories:

• Operating cash flow: This is your day-to-day cash movement. It includes revenue from sales, payments from customers and expenses like payroll, rent and utilities.
• Investing cash flow: Money going in and out related to investments. This could be purchasing equipment, acquiring another business or selling assets.
• Financing cash flow: Funds moving between your business and investors or lenders, such as business loans, issuing shares, or paying dividends.

Understanding these cash flow types and categories can help you spot potential financial trouble before it happens. 

Now that we’ve covered the basics, it’s time to understand why strong cash flow management matters for every business. 

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Why is cash flow important?

Steady, positive cash flow gives you the ability to cover expenses, invest in new opportunities and weather unexpected financial storms.

Here’s why visibility into cash flow should be a top priority for every business owner:

1. It keeps operations running smoothly

If you don’t have enough cash on hand, even a minor delay in customer payments can lead to missed payroll, unpaid suppliers or service disruptions.

2. It prevents reliance on expensive debt

When cash is tight, businesses often turn to high-interest credit lines or loans to cover expenses. Avoiding unnecessary debt keeps your business financially healthy.

3. It fuels business growth

Whether you want to expand into new markets, hire additional staff or upgrade equipment, having available cash allows you to jump on opportunities without hesitation.

4. It builds financial resilience

Unexpected costs, like equipment breakdowns or economic downturns, can cripple a business that isn’t financially prepared. Well-managed cash flow acts as a safety net.

“There’s a timing aspect to cash flow,” Jennifer McNamee, CPA and Senior Finance and Account Manager at Float, explains. “If you have a mismatch on the inflows and outflows, you could run out of cash. Then you have to tap into emergency solutions like debt or a line of credit, which are costly ways to finance your business.”

With better visibility and automation, you can manage timing mismatches and make proactive financial decisions.

Common challenges in managing cash flow

Even businesses with strong revenue can run into cash flow problems. According to a Float study, 65% of SMBs are dealing with long processing times for financial transactions, and 59% are experiencing lengthy loan approval processes—both issues that can lead to significant cash flow issues.

Here are some of the most common challenges that can impact financial stability:

Delayed customer payments

When businesses rely on invoices with long payment terms (e.g., net 30, net 60), it can create cash flow gaps. If customers take too long to pay, it affects the company’s ability to cover its own expenses.

Hefty upfront costs

Some businesses, especially those in retail or manufacturing, must pay for inventory, raw materials or equipment long before they generate revenue from sales.

Unexpected expenses

Emergencies happen. Whether it’s equipment repairs, tax obligations or market downturns, unexpected costs can drain cash reserves quickly.

Poor payment terms with vendors

If your vendors require quick payments while your customers take longer to pay, you may find yourself constantly short on cash.

Seasonality

Your business may have peaks and valleys in operations, much like an ice cream shop would during the winter. Accurately forecasting seasonal sales dips can help you prepare for the lull. 

Lack of cash flow visibility

If a business doesn’t regularly monitor cash inflows and outflows, it can be blindsided by a sudden shortage. Understanding cash flow trends through regular reporting is key to avoiding financial surprises.

How to calculate cash flow

Calculating cash flow is essential for understanding your business’s financial health. Accurate visibility into cash flow requires diligent expense management, revenue tracking and proactive forecasting. The primary tool used to calculate it is the cash flow statement, which provides a snapshot of how cash moves in and out of your business over a specific period.

You don’t need to be a CPA to make sense of this (although a cup of strong coffee might help). To keep things simple, you can calculate cash flow with this basic formula:

Cash Flow = [ Cash Inflows – Cash Outflows ]

Reading your cash flow statement will be slightly more complex. Cash flow statements track the movement of money in and out of your business and are divided into three main sections, as shown in the example below.

Let’s break down the parts of this cash flow statement a little more.

Operating activities 

These cover cash generated from day-to-day business operations, starting with net income and then adjusting for non-cash expenses, such as depreciation and amortization. Operating activities also account for changes in working capital, such as money tied up in accounts receivable, inventory and accounts payable. If your company sells products or services on credit, cash flow may be delayed, while paying suppliers later can temporarily improve cash flow.

Investing activities 

These focus on buying and selling long-term assets. This includes capital expenditures (CapEx), like purchasing equipment or property, which reduces cash. On the other hand, selling assets or investments brings in cash. Investing activities also include buying or selling marketable securities or acquiring other businesses.

Financing activities

These track cash movements related to investors and lenders. Raising funds through loans or issuing stock brings in cash, while repaying debt, paying dividends, or buying back shares reduces it. Financing activities reflect how your company funds its operations beyond its core business activities.

At the bottom of the cash flow statement, all of these cash movements are added up to show the net increase or decrease in cash for the period. This is reconciled with the beginning cash balance, leading to the final ending cash balance, or the actual cash the business has on hand at the end of the reporting period.

Once you understand how cash moves through your business, the next step is predicting what’s coming next.

Cash flow forecasting management tools and techniques

Forecasting turns financial data into foresight. It allows you to anticipate shortfalls before they happen and plan your next move with confidence. But forecasting is only as good as the data feeding into it. Managing cash flow manually through spreadsheets or disconnected systems can leave blind spots that make planning harder than it needs to be.

Modern tools solve this by blending real-time visibility with automation. Today’s cash flow platforms integrate directly with your accounting and banking systems to give you a clear picture of company spend and Float account balancest and how that timing affects your working capital. They automate reconciliations, flag delayed or unusual transactions and reduce the manual work that slows teams down.

Once that foundation is set, you can build stronger forecasts. Here’s what to focus on: 

1. Create your cash flow statement: Use historical inflows and outflows as your base.
2. Factor in seasonality and trends: Predict changes in demand, recurring payments and slow-paying clients as best you can.
3. Run multiple scenarios: Create “best case,” “expected” and “worst case” models to stress-test your cash position.
4. Automate and update often: Use digital tools, like Float or your ERP integration, to refresh forecasts weekly or monthly.

Platforms like Float’s expense management software provide the real-time spend visibility needed to inform stronger cash-flow forecasts.. Real-time visibility into cash positions can help optimize working capital as well as streamline approvals, and integrations with accounting tools, like NetSuite or QuickBooks make forecasts more accurate.

For a deeper dive, check out our cash flow forecasting guide.

Technology solutions for cash flow optimization

Technology is redefining how small businesses manage cash. The right system doesn’t just show you what’s happening—it helps you act on it.

Key solutions to consider:

• Automated expense management: Tools like Float’s platform give you transaction-level visibility, automate reimbursements and track spending across teams in real time.
• Bill pay solutions: Fast funding and next-day settlement for EFT and ACH payments ensure money moves when your business needs it, while global wires offer additional flexibility.: Predictive tools analyze spend patterns and help you plan for future liquidity needs.
• Smart corporate cards: Spend controls and category limits help you manage budgets automatically, preventing overspending.
• Integrated dashboards: Combine accounting, card spend and cash flow forecasts in one view to make faster decisions.

Together, these solutions optimize your cash flow and working capital, keeping your business agile. 

Importance of company cash flow management and analysis

Analyzing cash flow will help you make smarter business decisions. Here’s how.

Identifying financial trends

By consistently analyzing cash flow, you can recognize patterns in revenue and expenses, such as seasonal dips, delayed customer payments or unexpected cash shortages. This allows your business to plan ahead, ensuring you have enough cash reserves during slow periods and optimizing spending during peak times.

Ensuring liquidity

Maintaining a steady balance between cash inflows and outflows allows your business to cover essential expenses like payroll, rent and supplier payments without disruption. A clear picture of your cash position helps prevent cash shortages that could jeopardize operations.

Avoiding unnecessary debt

Poor cash flow management often leads businesses to rely on short-term loans, high-interest credit lines or emergency funding to stay afloat. By proactively monitoring cash flow, you can better anticipate financial needs, reduce reliance on costly borrowing and allocate funds more efficiently to support sustainable growth.

But cash flow management isn’t all about saving for a rainy day. Once you’ve mastered it, you can use cash flow to help your business grow by reinvesting strategically. “Sometimes, businesses get too focused on cash preservation and miss out on opportunities for growth,” says Jennifer. “Finding the right balance between saving and strategic reinvestment is key.”

With a balanced approach, reinvestment can help you expand operations by opening new locations, hiring employees, or increasing production capacity. It can support technological upgrades, such as investing in tools or automation, that improve efficiency and productivity. Overall, sound cash flow management sets you up for sustainable success in your business. 

How payment timing affects cash flow

The key to healthy cash flow is watching when money flows through your business—not just how much. This helps you avoid the cash crunches that can occur if customer payments arrive late or supplier bills come due too soon. Aligning inflows and outflows also reduces your reliance on short-term credit.

• Collect receivables faster: Send invoices promptly, shorten payment terms and automate reminders to bring cash in sooner.
• Delay outflows strategically: Negotiate longer payment terms with suppliers or schedule large payments after key receivables clear.
• Match inflows to obligations: Align billing cycles with recurring costs like payroll or rent to minimize shortfalls.

These timing adjustments smooth out volatility and improve working capital. Float’s expense management platform automates payment tracking and visibility, helping you stay ahead of due dates and avoid overdrafts. 

How to improve cash flow in a business

Here are 7 ways to take back control and improve your business’ cash flow.

1. Speed up receivables

One of the easiest ways to improve cash flow is to get paid faster. Send invoices as soon as work is completed and set clear payment terms. Consider offering early payment discounts to encourage quicker transactions, and automate reminders to follow up on outstanding invoices. The faster money comes in, the less likely you are to run into cash shortages.

2. Negotiate better payment terms

Negotiating extended payment deadlines with vendors gives your business more flexibility. If possible, arrange staggered or milestone-based payments for large projects to spread costs over time. Many vendors are open to flexible arrangements, especially if you maintain a strong relationship.

3. Cut unnecessary expenses

Conduct regular audits of your expenses to identify areas where you can cut back costs. Cancel unused subscriptions (hey, we’re all guilty of it!), renegotiate contracts and consider shifting to more cost-effective operational models. Even small savings can add up to significant cash flow improvements over time.

4. Maintain a cash reserve

Having a financial cushion is crucial for handling unexpected expenses. Set aside a portion of your profits into an emergency fund that can cover at least three to six months of operating costs. Consider placing these reserves in a high-yield business account to maximize returns on idle cash while keeping it accessible when needed. This ensures that you have funds available to navigate downturns without relying on expensive debt options. 

5. Optimize inventory management

For product-based businesses, inventory can be a major cash drain. Avoid overstocking by closely monitoring sales trends and using just-in-time inventory systems to reduce holding costs. Clearing out slow-moving stock through discounts or promotions can also free up cash that’s otherwise tied up in unsold products.

6. Leverage cash flow management tools

Technology can help you track and improve business cash flow. Software like Float provides real-time insights into cash movements, helping you forecast potential shortfalls and make informed decisions. Automating financial tracking also reduces human error and ensures you always have a clear picture of your financial standing.

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7. Diversify revenue streams

Relying on a single income source can be a risky strategy. Consider expanding your offerings, entering new markets or adopting subscription-based models to create more predictable revenue. Upselling and cross-selling to existing customers can also improve business cash flow without increasing acquisition costs.

Cash flow management for seasonal businesses

If your business has busy and slow periods, cash flow planning is non-negotiable. Retailers, tourism operators and agriculture businesses all face seasonal swings that can make budgeting unpredictable. Strong forecasting and visibility help you prepare—not just react.

Here are a few ways to stay steady:

1. Forecast for your slow season: Build cash reserves during peak periods to cover fixed costs during the slower periods.
2. Use rolling forecasts: Update projections regularly to adapt to new data and seasonal shifts.
3. Cut variable costs when demand dips: Reduce inventory or pause non-essential spending.
4. Explore flexible funding: Use credit facilities or Float’s spend management tools to manage short-term gaps responsibly.
5. Track spending in real time: Float’s dashboards show where money is going, helping you time expenses around revenue cycles.

For more on best practices, explore our article on working capital management.

Take control of your business cash flow

Cash flow management doesn’t have to be a guessing game. With Float, you gain real-time insights into your business’s financial health with a leading spending and expense management platform that helps you track outflow to make informed financial decisions. 

In a year when every dollar counts, visibility and timing are everything. Book a demo today to see how Float can help you master your cash flow and strengthen your business finances.

When cash is tight, every dollar counts. Business owners need to know not just how much capital they have, but how hard it’s working. 

That’s where the working capital turnover formula comes in. It’s a simple but powerful way to measure how efficiently your short-term resources generate revenue. Think of it as an important piece of the broader picture of working capital metrics that help owners measure efficiency.

The working capital turnover ratio tells you whether your business is squeezing value from its cash, receivables and inventory, or if money is sitting idle.  And in the current climate of rising costs, it’s a metric no business can afford to ignore. In fact, high operating costs are the top financial challenge faced by SMBs. 

So let’s dig in. We chatted with Sendy Shorser, President of Auxilium Financial, for expert insights on working capital turnover and what it means for his clients. 

What is working capital turnover?

At its core, working capital turnover shows how effectively your business uses its working capital (current assets minus current liabilities) to drive sales. 

The formula is straightforward:

Working capital turnover = Net sales ÷ Average working capital

Average working capital is calculated by dividing your beginning working capital plus your ending working capital by two.

Unlike the current ratio, which measures solvency or asset turnover (a broad view of overall assets), working capital turnover looks at short-term efficiency. It reveals how quickly your business can turn resources into revenue and is considered one of the most practical working capital metrics available.

“Working capital turnover is like short-term cash flow, which is the power behind a business,” says Sendy. “A company could be losing money, but if they have a strong cash position, they can survive a downturn and push through sudden challenges.” 

Why working capital turnover matters

Strong turnover is more than helpful math to review after things happen. With a proactive approach, it becomes a survival tool. A business with healthy working capital turnover can absorb unexpected costs, weather slow periods and still cover essentials like payroll and rent.

“A client of ours recently faced new tariffs on imported goods but weathered the storm with healthy working capital,” says Sendy. “She had the ability to accept reduced margins in the short-term and take time to assess the long term impact on her growth strategy.” 

In practice, a healthy working capital turnover ratio signals more than efficiency. It usually indicates clients are paying on time, collections are strong and the business is organized. 

“It also shows owners know how to use their vendors strategically by receiving faster and paying slower when it makes sense,” says Sendy.

How to calculate working capital turnover: A step-by-step guide

Understanding the formula is one thing, but seeing how it comes together in practice makes it much clearer. Breaking the calculation into simple steps allows you to apply it to your own numbers to see how efficiently your working capital is driving sales.

Here are four steps to figuring out your working capital turnover:

1. Find net sales for the period

Use your income statement to get the total net sales.

2. Calculate the beginning and ending working capital

Current assets minus current liabilities at the start and end of the period.

3. Find the average

Add beginning and ending working capital, then divide by two.

4. Apply the formula

Net sales ÷ Average working capital = Working capital turnover

For example, let’s look at a business with a net sales figure of $2,000,000 and see what we can learn from its working capital calculation. 

• Net Sales: $2,000,000
• Beginning Working Capital: $300,000
• Ending Working Capital: $500,000
• Average Working Capital = ($300,000 + $500,000) ÷ 2 = $400,000

Working Capital Turnover = $2,000,000 ÷ $400,000 = 5

This means that for every dollar of working capital, the company generated $5 in sales during the period. In other words, the net sales to working capital ratio is five, a strong indicator of efficiency.

How to interpret working capital turnover

High turnover can signal efficient use of capital, but too high a turnover may indicate thin liquidity. Low turnover can mean inefficiencies, such as slow receivables or excess inventory. The trick is not to view the number in isolation, and to compare within your industry. 

“Industry differences are critical,” says Sendy. “For example, Costco turns inventory in 30 days because everything moves fast and people pay immediately. A construction company might instead have ways to cut costs mid-project. Applying the same benchmark would make no sense.” 

Always evaluate working capital efficiency in context. For service businesses, turnover might look slower, but that isn’t necessarily a red flag.

“In some companies, efficiency comes from having the right supplies at the right time, not the fastest turnover,” says Sendy.

Pro tip: Compare your ratio to peers in your industry, not to a giant retailer ringing through thousands of barcodes every hour. 

Common challenges that affect turnover (and how to improve them)

Even when you know the formula and what the numbers mean, the real challenge is keeping your ratio healthy in day-to-day operations. Businesses often trip over the same obstacles, but spotting them early can make all the difference.

Working capital turnover can get dragged down by several recurring issues:

• Slow receivables: The longer an invoice sits unpaid, the less likely you are to collect. Failing to stay on top of receivables is a major pitfall. Instead, try tightening credit terms and requiring references before extending credit to help level cash flow.
• Excess or mismanaged inventory: Buying in bulk might save money upfront, but storing too much ties up cash. That volume discount doesn’t look so tempting once you factor in the storage fees until the product is sold. 
• Limited access to credit: Even profitable businesses can stumble without a cushion. It’s wise to gain access to credit before you need it, because once things get tight, it may be too late.

The fix often comes down to balance: collecting receivables faster, negotiating payables smarter and aligning inventory with realistic sales forecasts. Expense management, credit controls and thoughtful purchasing all play a role in improving working capital efficiency.

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Balanced capital efficiency is best

Working capital turnover management takes visibility, discipline and balance. Too low, and your capital is stuck. Too high, and you may be running on fumes. The sweet spot depends on your industry, your clients and your growth stage.

“You can have a very strong income statement and still go bankrupt because the balance sheet isn’t healthy,” says Sendy.

Remember, regular monitoring of working capital metrics helps you catch issues before they become crises. Tools like Float make it easier by improving visibility into business spend, automating payables and letting businesses earn interest on idle cash, which means every dollar works harder. 

Strong sales don’t always translate into smooth operations. If cash is tied up in receivables or inventory, or if bills are coming due faster than money comes in, your business can run into problems even while reporting profits. 

That’s why net working capital (NWC) matters. It’s a simple measure of short-term liquidity that shows whether you can cover day-to-day obligations and keep operations running. In this guide, we’ll explain what NWC is, how to calculate it and strategies you can use to manage it more effectively.

What is net working capital?

Net working capital (NWC) measures a company’s short-term liquidity and operating efficiency. At its simplest, it’s the difference between what you own in the near term and what you owe in the near term.

The basic net working capital formula

NWC = Current Assets – Current Liabilities

• Current assets include cash, accounts receivable, inventory and other assets that can be converted into cash within 12 months.
• Current liabilities include accounts payable, short-term loans, accrued expenses and anything else due within a year.

For example, if your business has current assets of $500,000 and current liabilities of $350,000, then:

NWC = $500,000 – $350,000 = $150,000

This positive balance means you can cover short-term obligations and still maintain a financial cushion.

Net working capital vs. working capital

The terms “working capital” and “net working capital” usually mean the same thing: the difference between current assets and current liabilities. The word net simply highlights that it’s a balance, or more simply, what’s left over after subtracting liabilities from assets.

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Why net working capital matters

Net working capital is a critical metric to know for your business, as it’s a clear snapshot of your company’s liquidity and short-term financial health. When looking at your net working capital, you’ll typically see:

• Positive NWC: You have enough to cover obligations and still keep operations moving.
• Negative NWC: Cash is flowing out faster than it’s coming in, signalling potential risk.
• Consistently healthy NWC: Gives you the flexibility to invest, expand and withstand downturns.

In times of rising costs or economic uncertainty, strong NWC management becomes even more critical. It helps your business stay resilient and ready to seize opportunities when others may be forced to pull back.

How to calculate net working capital

Calculating net working capital is straightforward, but the details matter. There are different ways to calculate net working capital, depending on how much detail you want to capture. 

Step-by-step (basic formula)

Let’s first start with the simple approach. This is the quickest way to see your short-term cushion.

1. Add up your current assets (cash, receivables, inventory, prepaid expenses)
2. Add up your current liabilities (accounts payable, short-term debt, accrued expenses)
3. Subtract liabilities from assets

Formula:
NWC = Current Assets – Current Liabilities

Net working capital example:

• Current assets = $500,000
• Current liabilities = $350,000
• NWC = $500,000 – $350,000 = $150,000

This means that the business has a $150,000 buffer to cover near-term bills.

Other ways to calculate

If you want a closer look at operations, you can adjust the formula:

• Operating formula: Excludes cash, securities and debt.
• Narrow formula: Focuses only on receivables, inventory and payables.

These variations highlight how much liquidity is tied to operations rather than cash or financing.

Tracking changes

You can also measure the change in net working capital by comparing periods. For example, if NWC was $150,000 last quarter and $100,000 this quarter, the $50,000 decrease means cash has been freed up.

Ratios to compare

Alongside NWC, ratios like the current ratio (Current Assets ÷ Current Liabilities) and quick ratio ((Current Assets – Inventory) ÷ Current Liabilities)) provide useful context. But NWC is still the most direct measure of short-term liquidity.

What does “good” net working capital look like?

There’s no single “good” number for net working capital, as much depends on your business model and industry. For instance, manufacturers often need higher NWC to cover long production cycles, while service firms can run leaner because they hold little to no inventory. A retailer, on the other hand, might operate with negative NWC and still be healthy because they sell inventory before supplier payments are due.

The best way to assess your NWC is by tracking your own results over time and comparing them to industry peers, rather than relying on a fixed benchmark.

Common challenges that affect net working capital

Even with a solid balance sheet, everyday business realities can put pressure on your net working capital. Some of the most common challenges include:

• Late customer payments: Receivables pile up and delay the cash you need to run operations.
• Excess inventory: Cash gets locked into stock that isn’t moving quickly enough.
• Short-term debt: Repayment deadlines can drain liquidity and limit flexibility.
• Seasonal demand swings: Peaks and valleys in sales create uneven inflows and outflows, making planning difficult.

Recognizing these challenges early is the first step toward improving your net working capital and avoiding cash flow crunches.

Strategies to improve & manage net working capital

Strong net working capital management helps smooth out cash flow swings and gives you more control over day-to-day operations. Here are proven tactics to help you master it:

1. Speed up receivables: Tighten credit terms, send timely invoices and follow up on late payments.
2. Negotiate supplier terms: Extend payment terms without harming relationships.
3. Streamline inventory: Use just-in-time practices or forecasting tools to reduce excess stock.
4. Leverage short-term financing: Options like lines of credit, invoice factoring or interest-free credit access like Float’s Charge Card (combined with Business Accounts) can help smooth cash flow and provide quick access to working capital.
5. Invest in forecasting: Using real-time expense tracking and ERP integrations—like those offered by Float—can be great tools to help support more accurate cash flow forecasting.

Proactive management ensures your reserves are working for you instead of sitting idle or getting stuck in receivables and inventory.

For more information, read our guide on how to leverage credit for effective working capital management.

How Float helps improve your net working capital

Float’s complete business finance platform helps improve your net working capital by:

• Providing fast, unsecured credit with Charge so you don’t need to tap into reserves
• Earning up to 4% on funds held in your Float Business Account
• Enabling faster, controlled spending through real-time card and approval management
• Reducing FX and wire fees with transparent, low-cost international payments

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The bottom line on net working capital

Net working capital is one of the clearest indicators of your company’s financial health. It shows whether you can meet short-term obligations and how efficiently your business is operating.

The key is to calculate NWC regularly, track changes over time and apply strategies that strengthen your position. Done well, it gives your business the resilience to handle today’s challenges and the flexibility to seize tomorrow’s opportunities.

Float can help you get there. With tools to cut down on expense reporting, resources to tackle cash flow problems and a deeper explanation of working capital, you’ll be set up to make every dollar work harder for your business.

Many businesses appear profitable on paper but still struggle with cash flow issues. That’s because profits and liquidity are not the same thing. You can record healthy sales and margins yet still struggle to pay bills if your short-term finances aren’t managed well.

One of the simplest and most common ways to assess short-term financial health is the working capital ratio. Sometimes called the current ratio, this quick calculation shows whether you have sufficient assets to cover your current liabilities.

In this guide, we’ll explain what the working capital ratio is, how to calculate it, how to interpret the results and how to use it to strengthen your business.

What is the working capital ratio?

The working capital ratio, also known as the current ratio, is one of the most commonly used tools in working capital management. It’s calculated using the working capital ratio formula: 

Current assets ÷ current liabilities

Current assets include cash, receivables, inventory and other resources that can be converted into cash within 12 months. On the other hand, current liabilities include accounts payable, short-term debt, accrued expenses and anything else due within a year.

Because it uses current assets and liabilities, the working capital ratio is also referred to as the current ratio. Both terms refer to the same measure.

To learn more, read this guide on working capital explained.

Why the working capital ratio matters

The working capital ratio is a practical test of whether your business can cover day-to-day obligations.

• For lenders: A strong ratio signals that you’re less likely to miss repayments, making it easier to secure loans
• For investors: It provides a quick snapshot of liquidity and overall financial stability
• For suppliers: A healthy ratio reassures partners that you’ll pay invoices on time
• For managers: It’s a tool to spot risks early and keep operations running smoothly

In times of tighter credit or uncertain markets, monitoring your working capital ratio becomes even more important. It can be the difference between surviving a downturn and running into solvency problems.

Step-by-step: how to calculate the working capital ratio

Here’s a straightforward process to follow to calculate your working capital ratio:

Step 1: Identify current assets

Start with the asset side of your balance sheet. Only include items you expect to turn into cash within 12 months. Key assets include:

• Cash and cash equivalents
• Accounts receivable
• Inventory
• Marketable securities (investments you can easily sell for cash)

Step 2: Identify current liabilities

Then, move on to the liabilities side of your balance sheet. Again, focus only on what comes due within a year. Important liabilities include:

• Accounts payable
• Short-term loans or lines of credit
• Accrued expenses such as wages and taxes payable
• Current portions of long-term debt

Step 3: Apply the formula

Divide total current assets by total current liabilities.

Working capital ratio example:

If current assets = $500,000 and current liabilities = $250,000, then the working capital ratio would be calculated as:

$500,000 ÷ $250,000 = 2.0

Here, the working capital ratio is 2.0. That means you have $2 in current assets for every $1 of liabilities.

For more details on using credit effectively to support liquidity, read this guide on working capital management.

How to interpret your ratio

Knowing your ratio is only the first step. The real value comes from interpreting what the number means for your business.

• Below 1.0: Warning sign. You may not have enough assets to cover liabilities, raising the risk of missed payments
• Between 1.0 and 2.0: Generally considered healthy. You can cover obligations and still keep assets productive
• Above 2.0: Could mean inefficiency. Too much cash or inventory may not be working hard for the business

Industry benchmarks matter

Different industries have different norms. Retailers often run leaner because inventory turns over quickly, while manufacturers may need higher ratios to support longer cycles. Service businesses usually fall in between. 

So, what is a good working capital ratio? A range of 1.0 to 2.0 is a useful guide, but the best comparison is always against your sector peers.

Common mistakes when measuring the working capital ratio

The calculation is simple, but that doesn’t mean it can’t be misused. Avoid these common errors:

• Using outdated data. A balance sheet snapshot can change quickly. Using old figures may give you a misleading sense of security. Outdated data can mislead your analysis. Tools like Float provide real-time expense tracking, ensuring that current liabilities reflect your most up-to-date obligations. This visibility supports better decisions and reduces the risk of liquidity surprises.
• Ignoring seasonality. Businesses with seasonal peaks often show distorted ratios at different times of year. For example, a retailer might look flush after the holiday season but much leaner in the spring.
• Treating it as one size fits all. The right ratio for a tech company may not apply to a construction firm. Always interpret your number in context.
• Focusing on the ratio alone. Liquidity is important, but efficiency and profitability matter too. Look at the ratio as part of a bigger picture.

How to improve your working capital ratio

If your ratio looks weak or if you want to build resilience, here are practical steps to improve it:

1. Collect receivables faster

Getting paid sooner strengthens your ratio immediately. Offer discounts for early payments and tighten credit terms to reduce delays. Automated invoicing tools can also speed up the process and reduce errors.

2. Manage payables strategically

Make the most of favourable supplier payment terms to keep cash longer. Negotiate extended timelines whenever possible, but avoid paying too early unless a discount makes it worthwhile. This balance protects cash without damaging supplier relationships.

3. Optimize inventory turnover

Too much stock ties up cash that could be used elsewhere. Improve forecasting to avoid overordering and clear out obsolete items quickly. For some businesses, just-in-time practices can also help reduce holding costs.

4. Forecast cash flow

Regular cash flow forecasts help you see problems before they happen. Tracking inflows and outflows provides a clear picture of your current financial position. With that visibility, you can plan financing or adjust expenses with confidence.

If you need to strengthen your liquidity position, solutions like Float’s unsecured credit (Charge) and high-yield business accounts can help increase your cash reserves without tying up capital in rigid financial products. These tools support both agility and earnings, giving you the freedom to respond to cash flow needs without delay.

With a clear picture of inflows and outflows, you can plan financing or expense adjustments. For more detail, see our guide to improving business cash flow.

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Putting the ratio into practice

The working capital ratio is simple to calculate and powerful for spotting risks. Regular monitoring provides a clear view of your ability to meet obligations and helps build financial resilience. But automating expense approvals and spend controls doesn’t just improve efficiency. It also keeps your liabilities more predictable. With Float’s automated workflows, you can reduce manual processes, control spend in real time and support a more stable working capital ratio.

Even small improvements in receivables, payables or inventory can strengthen liquidity. Tools such as Float’s high-yield business accounts and automated expense management make it easier to keep cash working for your business.

Cash flow is one of the biggest challenges business owners face. Even profitable companies can feel strapped for cash if too much money is tied up in receivables, inventory or debt. It’s a frustrating paradox: you’re making sales, yet your bank account looks like you’re barely surviving. 

The key to unlocking that paradox is working capital. 

Working capital is a practical measure of whether your business has enough resources to run monthly day-to-day, cover unexpected expenses and invest in growth when the opportunity arises. 

In this guide, we’ll unpack what it means, why it matters and, most importantly, how you can take control of it with proven strategies. 

What is working capital? 

Working capital measures the difference between what you own and what you owe in the short term. Here’s the formula:

Working capital = current assets – current liabilities 

• Current assets are resources that can be turned into cash within a year: cash, accounts receivable, inventory and short-term investments. 
• Current liabilities are obligations due within a year: accounts payable, accrued expenses, short-term loans and taxes payable. 

A simple example of working capital

Imagine your business has: 

• $300,000 in cash, receivables and inventory (current assets)
• $200,000 in payables and short-term debt (current liabilities) 

According to the formula, you have $300,000 – $200,000 = $100,000. In other words, your business has a $100,000 buffer to keep things moving, such as to pay staff, cover rent, buy supplies or invest in marketing campaigns, etc.

To see how this plays out, take two companies of similar size:

• Company A has a positive working capital of $100,000. When a supplier invoice comes due, the business can easily pay it and still have cash left to order new inventory and launch an ad campaign. Operations flow smoothly.
• Company B has a negative working capital of –$50,000. Although it’s generating sales, most of the money is tied up in unpaid invoices. When payroll hits, it’s a scramble to cover the gap, even dipping into costly short-term loans.

The difference isn’t profitability. Both companies could be making money on paper. The difference is timing. Strong working capital ensures you have funds on hand when obligations arise, while negative working capital leaves you exposed to stress, delays and missed opportunities.

Why is working capital important? 

Working capital is the heartbeat of business operations and is one of the clearest indicators of whether a business can cover day-to-day expenses. Here’s why it matters so much: 

Liquidity

It shows whether you can pay bills, salaries and suppliers on time. A positive number means you can breathe easier, while a negative number signals you may need outside funding or cuts. 

Operational efficiency

Tight working capital management highlights bottlenecks, such as slow-paying customers or excessive inventory, that drag down cash flow. 

Growth potential 

Businesses with strong working capital can reinvest in growth, from hiring staff to opening new locations. Without it, opportunities slip away. 

Types of working capital

Working capital can take different forms. The interpretation depends on the balance between assets and liabilities. It can be positive or negative, and many experts also rely on the working capital ratio to quickly gauge a business’s financial health.

Positive working capital 

Positive working capital means that your current assets are greater than your liabilities. The business can pay obligations and still have funds for growth—for example, a retailer with cash on hand plus inventory that sells quickly. 

Negative working capital 

Negative working capital means that your current liabilities are greater than your assets. The business may struggle to pay its bills, even if it appears profitable on paper. Think of a construction company waiting months for invoices to clear while still paying staff weekly. 

The working capital ratio

Also known as the current ratio, this is calculated by: 

Current assets/current liabilities

It is a quick metric for the health of the business. 

• A ratio of 1.2 to 2.0 is generally considered healthy, showing that you have enough assets to cover obligations with some breathing room.
• A ratio below 1.0 suggests liabilities exceed assets, meaning you may struggle to meet obligations without relying on outside funding.
• A ratio above 2.0 may look safe, but it can also mean you’re holding too much idle cash or inventory that could be invested to drive growth.

For instance, if your company has $150,000 in current assets and $100,000 in current liabilities, its current ratio is $150,000 ÷ $100,000, or 1.5. That puts you right in the healthy range with enough liquidity to cover obligations and some room to invest in operations. By contrast, if liabilities rose to $200,000 while assets remained the same, your ratio would drop to 0.75 ($150,000 ÷ $200,000), signaling potential trouble.

Think of the ratio as a snapshot rather than the full story. A seasonal retailer, for example, might dip below 1.0 in the off-season but rebound during the holidays. Likewise, a fast-growing SaaS business might run lean on working capital because subscription payments are predictable.

Tip: Don’t rely solely on the ratio. Pair it with cash flow analysis and industry benchmarks to get the full picture of how your business compares.

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Common challenges

If working capital is so straightforward, why do businesses struggle with it? There are a few common reasons:

• Slow-paying customers: When accounts receivable drag, cash flow dries up. You’ve done the work, but you’re essentially financing your customers’ operations until they pay. 
• Heavy short-term debt: Short-term loans or lines of credit can help smooth cash flow, but high interest rates and strict repayment schedules quickly eat away at liquidity. 
• Seasonal fluctuations: Retailers, hospitality businesses and contractors often face big swings in demand. During peak season, cash piles up. In the off-season, obligations remain but income drops. 
• Inventory build-up: Excess stock ties up cash that could be used elsewhere. Worse, unsold goods may lose value over time. 
• Poor forecasting: Without visibility into upcoming expenses or revenue dips, businesses are caught off guard. A surprise tax bill or sudden equipment failure can wipe out liquidity. 

Each of these challenges is common, but none are permanent. The right strategies can shift your business from reactive to proactive.

Strategies to improve working capital

If you’re struggling with working capital, there is good news: it isn’t a fixed number. Small shifts in how you manage receivables, payable and inventory can free up significant cash. Here are some strategies you can use to improve your working capital:

1. Speed up receivables

• Send invoices immediately after work is completed.
• Offer early-payment discounts. For example, “2% off if paid within 10 days.”
• Automate invoicing and reminders so nothing falls through the cracks.
• Use digital payment options to reduce processing delays.

Example: A design agency could switch from mailing invoices to automated online billing, significantly reducing its average payment time and unlocking tens of thousands of dollars in cash each quarter.

2. Manage payables wisely

• Negotiate longer terms with suppliers.
• Time payments to preserve cash without risking supplier relationships.
• Consolidate purchases to earn better discounts.

Tip: Never delay payments to the point of harming relationships. Suppliers who trust you may extend favourable terms, giving you flexibility.

3. Optimise inventory

• Use demand forecasting tools to align stock with sales patterns.
• Run clearance promotions on slow-moving items.
• Shift to just-in-time inventory where possible to reduce storage costs.

Example: A cafe can reduce over-ordering of perishable goods by tracking sales data week by week, lowering inventory waste and improving cash flow.

4. Improve cash flow forecasting

Anticipating cash gaps enables you to plan, rather than panic.

• Build rolling forecasts updated monthly or weekly.
• Track actuals against forecasts to improve accuracy.
• Identify crunch points early and arrange financing before it’s urgent.

Want to sharpen your forecasting? Start with understanding your cash flow statement.

5. Use financing tools

Financing can be a lever, not a crutch, if used wisely.

• Lines of credit: Provide flexible access to cash for short-term needs.
• Invoice factoring: Sell receivables for immediate cash if customer payment cycles are long.
• Supply chain financing: Improve supplier relationships while smoothing your own outflows.
• High-yield accounts: Keep reserves working for you without lockups or minimums. Float’s Business Accounts earn up to 4% annual interest on idle funds (on balances ≥ $50,000), while remaining fully liquid. Withdrawals are simple and typically settle to your connected bank account within 2–5 business days.

For more options, see our guide on leveraging credit for effective working capital management.

6. Leverage technology

Modern spend management tools can take a lot of the guesswork out of working capital. Automated card controls, instant reporting and integrations with your accounting system provide real-time visibility. With Float, for example, you can issue vendor-specific cards with built-in spend limits and instantly match receipts. That kind of automation saves finance teams hours of manual work and gives leadership better insight into liquidity at any moment.

Note: Float Business Accounts are designed to work alongside your existing bank account. While they offer powerful cash management and spend automation, some features—like pre-authorized debits (PADs) and cheque handling—aren’t yet supported. For most businesses, Float complements rather than fully replaces your primary bank account.

With these strategies in place, businesses can turn working capital management into a strength rather than a stress point.

Working capital vs. cash flow

Working capital and cash flow are related but they are different from one another.

• Working capital is a snapshot of current assets vs liabilities.
• Cash flow is the actual movement of money in and out over time.

A profitable company may still struggle if cash is tied up in receivables or inventory. Similarly, a company with strong working capital can still encounter difficulties if its future cash flow is unpredictable.

Working capital is like your bank balance today. Cash flow is your income and expenses over the next six months. Both matter.

For more depth, check out our guide to tracking, analyzing and improving business cash flow.

Determinants of working capital

How much working capital your business needs isn’t fixed. It depends on several internal and external factors. Some of the biggest include:

• Industry norms: Retailers usually carry more inventory, while service businesses lean more on receivables. Each sector has its own baseline for what “healthy” looks like.
• Business cycle: Companies in growth mode often need extra cash to fund expansion, while mature businesses tend to run more efficiently.
• Customer terms: Offering generous payment terms can win business, but if collections take too long, your cash position suffers. Tools that speed up payments and reduce friction, such as automated card-based spend tracking, help you maintain strong liquidity.
• Supplier terms: Strong relationships can secure better terms, giving you flexibility. On the other hand, strict or short payment terms can restrict liquidity. With Float, businesses can issue vendor-specific cards and control timing to better align supplier payments with available cash.
• Operational efficiency: Faster turnover of receivables and inventory reduces the amount of working capital required to operate comfortably. Real-time visibility from Float’s platform helps finance teams catch bottlenecks early and keep operations efficient.

Example: A SaaS company may run with minimal inventory but carry large receivables if customers are billed annually. Meanwhile, a retailer may need higher working capital to keep stock ready for seasonal demand. Both are healthy, but the requirements differ.

Understanding these determinants helps you set realistic expectations and fine-tune your strategies. With the right tools, you can move from reactive cash crunches to proactive planning.

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Key takeaways for business owners

Working capital may sound like an accounting detail, but it’s one of the clearest signals of your business’s financial health. Here are the main points to remember from this article:

• Working capital is one of the clearest indicators of your business’s short-term financial health.
• Positive working capital signals stability, while negative calls for urgent action.
• You can improve your position by tightening receivables, optimising payables and keeping inventory under control.
• Strong cash flow forecasting and the right financing tools help bridge temporary gaps and keep reserves productive.

By consistently focusing on these areas, you’ll give your business the flexibility to handle challenges today while building a stronger foundation for long-term growth.

Put working capital on your radar with Float

Working capital is the fuel that keeps your business moving. By monitoring your position regularly and applying the strategies above, you can take control of cash flow, reduce stress and build a business that’s not just profitable but sustainable.

Ready to put your funds to work?

Explore Float’s Business Accounts and modern spend tools to strengthen liquidity today.

What’s the common instinct when markets get rocky? Raise more money. But piling on debt or chasing another funding round isn’t the only answer. Capital efficiency is about getting more mileage from the funds you already have—disciplined growth with a built-in safety net.

And this discipline matters more than ever in today’s market. Nearly two-thirds of SMEs surveyed earlier this year expect economic conditions to decline over the next 12 months, according to the BDC. Keeping cash flow and capital efficiency top of mind is what will help prevent you from flying blind into another funding round or burning through the money you already have. 

We spoke with Brian Didsbury, CPA and Senior Manager/Controller at LiveCA, to help business owners understand what’s at stake with capital efficiency and clarify a few financial concepts along the way.

What is capital efficiency?

At its core, capital efficiency measures how effectively a company uses its resources to generate revenue and growth. Picture your dollars working overtime instead of clocking out early.

Metrics like return on capital employed (ROCE), burn multiple, revenue per employee and gross margin return on investment (GMROI) are some of the most common capital efficiency metrics. 

“Textbook jargon can be confusing, but capital efficiency isn’t that different from running your household. You need to know what’s coming in, what’s going out and whether you’re building enough cushion for the future,” says Brian. 

Pro tip: Being capital-efficient isn’t the same as being profitable. A business might appear profitable on paper while being cash-strapped, or conversely, burn through too much cash in pursuit of growth. Efficiency is about balance.

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Why capital efficiency matters

Capital efficiency is a crucial accounting metric. Used properly, it also serves as a lifeline for long-term growth. 

Well-implemented capital efficiency:

• Enables businesses to grow without constant fundraising or debt
• Attracts investors by showing disciplined financial management
• Improves resilience in downturns or slow cash cycles
• Frees up resources for innovation and scaling

Efficiency is tied to control and predictability that help you meet commitments. For example, if your finances are tightly timed, late payments can create strain in trying to meet payroll cycles. 

How to measure capital efficiency

Let’s look at some common ways finance pros might talk about capital efficiency metrics and capital efficiency ratios (or how much money goes into the business compared to what it generates).

Here are a few key ways to assess it:

• Burn multiple: For startups, this shows how much cash you’re burning to generate new revenue (net burn ÷ net new ARR).
• Return on capital employed: EBIT ÷ capital employed. A higher ratio signals stronger returns on every dollar invested
• Cash conversion cycle: The time it takes to turn investments like inventory into actual cash flow.
• Revenue efficiency ratios: Revenue ÷ capital invested.

Brian notes that the best measure depends on your business’s stage and structure.

“For startups that aren’t profitable yet, it’s all about understanding runway,” he says. “You need to know how much cash you have and how long it will last before you need to raise or become cash flow positive. For more mature SMBs, debt ratios and debt service costs matter more.”

These capital efficiency ratios help businesses see if their funds are working for them or sitting idle. 

Common barriers to capital efficiency

If capital efficiency is so valuable, why do so many businesses trip over it? Simple. They can’t manage what they can’t see. 

Without clear visibility into where money’s actually going, owners are left making gut calls instead of data-driven ones. Those kinds of quickfire decisions work for lunch orders, not strategic financial moves.

Some of the most common hurdles include:

• Excessive overhead or wasteful spending
• Poor payment terms, such as slow receivables and fast payables
• Over-investment in low-return projects
• Relying on external funding instead of optimizing internal cash

Brian adds that mismatched cash cycles are a recurring problem. 

“Businesses that sell physical goods often run into this,” he says. “They buy inventory up front, but it takes months to sell. Suddenly, they can’t make payroll because all their cash is tied up in stock.”

Strategies to improve capital efficiency

Drastic cuts aren’t the solution to improving working capital efficiency. Instead, prioritize smart, practical adjustments. 

Brian recommends six go-to strategies for capital efficiency:

1. Speed up receivables

Automate invoicing and collections, and use platforms and tools so clients pay automatically. You should avoid chasing invoices whenever possible.

2. Slow down payables

Don’t pay vendors early unless there’s a discount. Use full credit terms and negotiate for extensions where possible.

3. Right-size your cash reserves

Cash keeps you running, but too much just sitting in the bank is dead weight. Anything above what you need for working capital should be earning interest, paying shareholders or funding growth.

4. Cut spend bloat

Audit subscriptions and tools regularly. If something isn’t being used, cancel it.

5. Buy smarter

Lock in annual contracts for core software tools, as these types of savings can hit 10 to 20%. For hardware like laptops, leasing may beat buying outright.

6. Use automation and tools

Real-time visibility makes all the difference. Float allows you to analyze spend by vendor or category, spot waste quickly and even earn yield on excess cash.

The right mix of discipline and automation helps businesses stretch every dollar further and strengthens capital efficiency in financial management. 

Capital efficiency in different business contexts

While the strategies apply universally, the emphasis can shift by stage as your business grows or by the type of business you run. 

Startups are typically pre-profit and cash-flow negative. Their focus should be on runway, or controlling spend long enough to hit profitability or the next funding round.

More established SMBs, by contrast, face questions of capital allocation. For these businesses, it’s less about survival and more about sustainability. If cash significantly exceeds your working capital needs, that’s poor capital allocation. There might be a better use for that cash, like growth investments, dividends or acquisitions. 

For non-profits, capital efficiency looks a little different. The goal isn’t to maximize shareholder returns, but to ensure that every donated or granted dollar goes as far as possible to support impact. 

Float: Supporting best practices for sustainable capital efficiency

Capital efficiency doesn’t mean doing more with less. It means doing more with what you have, with confidence and clarity. Thriving businesses manage cash cycles tightly, cut waste ruthlessly and use tools to provide visibility and control.

Float was designed to make that job easier. From automating expense capture to earning yield on unused balances and providing finance teams with real-time spend controls, it helps Canadian businesses make working capital efficiency an everyday practice.

“The biggest risk is making decisions based on gut, not data,” says Brian. “When you have visibility into spend, into timing and into your real runway, you can make smarter calls.”

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