How can a business increase its working capital ratio?

A business can increase its working capital ratio by effectively utilizing its idle cash, particularly through reinvestment strategies that provide a return greater than the cost of capital. The working capital ratio, calculated as current assets divided by current liabilities, indicates a company's liquidity and short-term financial health. By reinvesting idle cash into opportunities that yield returns exceeding 2, a business can enhance its current assets without increasing its current liabilities, thereby improving the working capital ratio.

This strategy involves making informed investment decisions that can foster growth while simultaneously maintaining a healthy balance of liquid assets. Such reinvestment not only increases the amount of current assets but can also contribute to long-term success, ensuring that the business can meet its short-term obligations more effectively.

In contrast, increasing operating expenses or negotiating to raise debts could strain the company's cash flow, impacting the working capital ratio negatively. Paying creditors in full, while a sound financial principle, does not directly contribute to increasing the working capital ratio; it simply maintains existing liabilities without addressing the need to enhance current asset levels.