A profitable project does not guarantee that cash will be available when payroll is due. Financial questions help distinguish short-term resources, debts and profit. Begin with what each statement measures: a balance sheet shows a position at a date; an income statement describes performance over a period. S12
Working capital and current ratio: two different calculations
Suppose a business has $80,000 in current assets and $50,000 in current liabilities. Working capital is current assets minus current liabilities: $30,000. The current ratio divides those same figures: 1.6 to 1. Working capital is a dollar amount; the current ratio expresses the relationship between assets and liabilities.
Is inventory included in the quick ratio?
Unlike the current ratio, the quick ratio excludes inventory. Using the simplified study formula of current assets minus inventory, a business with $20,000 of inventory has a quick ratio of ($80,000 − $20,000) ÷ $50,000 = 1.2 to 1. CSLB’s reference book uses this simplified formula. A more detailed analysis should exclude other assets that are not readily available, such as prepayments. State the definition you use. S12
Gross margin is not markup
If revenue is $100,000 and the corresponding direct cost is $75,000, gross profit is $25,000. Gross margin is $25,000 ÷ $100,000 = 25%. Markup on cost is $25,000 ÷ $75,000, about 33.3%. Confusing the denominator changes the price you need to charge.
Interpret the result
No single ratio guarantees a healthy business. Collection delays, inventory quality and upcoming liabilities matter. A business target such as 1.5 or 2 is not a universal CSLB licensing requirement.
For practice, write the formula before entering numbers and label the result as dollars, a percentage or a ratio. Then explain what it tells you and what it cannot tell you. This reduces both calculation errors and false confidence.
Sources
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