Working Capital Ratio Calculator for Construction Companies
What Is the Working Capital Ratio?
The working capital ratio measures whether your business has enough short-term assets to cover its short-term obligations. It is one of the first numbers a banker or surety agent calculates when reviewing your financial statements, and it directly affects your ability to get loans and bonding capacity.
Working capital is the financial cushion that keeps your business running between the time you spend money on a job and the time you collect payment. In construction, that gap can be significant. A weak working capital position is one of the most common reasons contractors run into cash flow problems even when they are busy.
The Formula
Working Capital Ratio = Current Assets / Current Liabilities
Definitions
Current assets are assets you expect to convert to cash within the next 12 months. For a construction company this typically includes cash, accounts receivable, costs in excess of billings, and prepaid expenses.
Current liabilities are obligations due within the next 12 months. For a construction company this includes accounts payable, accrued expenses, billings in excess of costs, and the current portion of any long-term debt.
A Worked Example
A subcontractor has the following balance sheet items:
Current assets:
Cash: $180,000
Accounts receivable: $620,000
Costs in excess of billings: $140,000
Prepaid expenses: $25,000
Total current assets: $965,000
Current liabilities:
Accounts payable: $310,000
Accrued expenses: $85,000
Billings in excess of costs: $95,000
Current portion of long-term debt: $60,000
Total current liabilities: $550,000
Working Capital Ratio = $965,000 / $550,000 = 1.75
This is a solid result. The contractor has $1.75 in current assets for every $1.00 of current obligations.
What the Number Means
A ratio below 1.0 means your current liabilities exceed your current assets, which is a serious warning sign. A ratio between 1.0 and 1.2 is marginal and will draw scrutiny from lenders and surety agents. Between 1.2 and 1.5 is acceptable for most financing purposes. Above 1.5 is considered strong and supports meaningful bonding capacity.
Construction-Specific Considerations
Two items deserve special attention on a contractor's balance sheet. Costs in excess of billings (also called underbillings) represents work you have completed but not yet billed. It counts as a current asset but only converts to cash when you invoice and collect. Billings in excess of costs (overbillings) represents cash you have collected for work not yet completed. It counts as a current liability because you owe that work to your customer.
A contractor with large underbillings relative to overbillings may show a healthy working capital ratio on paper while actually facing a cash timing problem. Surety agents and experienced lenders know to look at this closely.