WORKING CAPITAL RATIO RUNS YOUR BONDING CAPACITY
The working capital ratio is current assets divided by current liabilities. Sureties want 1.5x or higher; 2.0x signals strong capacity. Banks use the same number for LOC renewals, with most asking for at least 1.3x. For a sub with $1.4M in current assets and $800K in current liabilities, the ratio is 1.75. Above the 1.5x floor, bonding capacity grows; below it, capacity gets capped and growth gets externally limited. The ratio is the number that decides whether you can take the next $2M job.
Sureties don’t finance growth on revenue alone. They finance it on liquidity. The working capital ratio is the read.
WHAT GOES IN, EXACTLY
Working capital ratio is one of the simplest financial metrics to calculate and one of the most consequential. The formula:
Working Capital Ratio = Current Assets ÷ Current Liabilities
Both numbers come from the balance sheet. “Current” means convertible to cash or due to be paid within 12 months.
Current assets typically include:
- Cash and cash equivalents
- Accounts receivable (excluding retention older than 12 months)
- Costs in excess of billings (CiE) — work performed not yet billed
- Materials inventory and stored materials
- Prepaid expenses
- Short-term investments
Current liabilities typically include:
- Accounts payable
- Accrued payroll and benefits
- Line of credit balance
- Current portion of long-term debt (12-month payments due)
- Billings in excess of costs (BiE) — revenue billed not yet earned
- Sales and payroll taxes payable
- Customer deposits
Divide the first by the second. That’s your ratio. Most subs we walk into can produce it in 30 seconds from a clean balance sheet. If yours can’t, that’s the first flag.
WHAT EACH BAND ACTUALLY MEANS
| RATIO | SURETY READ | BANK READ | CAPACITY IMPACT |
|---|---|---|---|
| Below 1.0x | Critical — insolvent on paper | LOC at risk, no expansion | Bonding pulled or capped |
| 1.0x – 1.3x | Tight — one bad month from trouble | Renewals possible, no growth | Capacity capped at current |
| 1.3x – 1.5x | Acceptable but watched | LOC growth possible | Modest capacity growth |
| 1.5x – 2.0x | Healthy — comfortable position | Standard underwriting | Standard capacity supports growth |
| Above 2.0x | Strong — significant headroom | Aggressive LOC available | Aggressive capacity available |
Different sureties have different thresholds. The 1.5x floor is the default for most standard construction sureties on subs in the $1M–$12M range. Higher-tier sureties on larger accounts may accept 1.3x for established clients. Specialty sureties on tighter margin work may require 1.7x or higher. Know which surety you’re working with and what their specific threshold is.
THREE WAYS THE NUMBER LIES TO YOU
UNCOLLECTIBLE AR PADDING THE TOP NUMBER
An AR balance with $150K from a GC that went bankrupt 18 months ago overstates your current assets by $150K. The surety’s reviewer will adjust it down during their analysis. Your internal ratio might be 1.6x; their adjusted ratio comes in at 1.35x. Better to write off uncollectible AR on your own books than have the surety discover it during underwriting. Same for retention older than 12 months — technically long-term, not current.
BiE AND CiE FROM AN INACCURATE WIP SCHEDULE
If WIP calculations are off — stale estimated costs, sloppy percent-complete, change orders booked wrong — the BiE and CiE positions on your balance sheet are wrong. BiE sits in current liabilities; CiE sits in current assets. A $400K BiE overstatement flows directly through to a much weaker working capital ratio than your books show. WIP accuracy isn’t just a job-level concern; it shows up on the financial statements every surety reviews.
LOC BURIED IN LONG-TERM DEBT
A line of credit is current debt — due on demand or due at annual renewal. Some books classify it as long-term, which artificially improves the ratio. Sureties reclassify during their review. Show the LOC as current on your own balance sheet so the number you see is the number they’ll see. Surprises during underwriting don’t favor the contractor.
FIVE WAYS TO IMPROVE THE RATIO WITHOUT RAISING CAPITAL
COLLECT AR FASTER
Aggressive collection on 30+ day invoices converts AR (which sureties may discount for age) into cash (which they don’t). Same dollar value, better balance sheet quality. Most subs we engage with recover $50K–$300K in collectible-but-uncollected AR in the first 30 days. The ratio improvement is structural.
RESTRUCTURE SHORT-TERM EQUIPMENT DEBT
Equipment financing with 24-month terms puts the full 12 months of payments in current liabilities. Refinancing to a 60-month term moves the balance into long-term and lifts only one year’s payments to current. The total debt doesn’t change; the ratio improves immediately. Worth exploring at every refinancing window.
CLEAN UP THE WIP SCHEDULE
If WIP overstates BiE because percent-complete is wrong, fixing the math removes phantom liability from the balance sheet. Same business, same cash position, but accurate numbers that move the ratio. WIP cleanup is one of the highest-leverage moves available because the change shows up immediately and it doesn’t require any actual operational change.
RETAIN EARNINGS INSTEAD OF DISTRIBUTING
Profit distributions reduce equity, equity supports working capital, working capital drives the ratio. S-corps and LLCs especially feel the temptation to distribute everything at year-end. Treating retained capital as strategic investment in bonding capacity changes the math over multiple cycles. Slower lever than the others but compounding.
TIME THE BALANCE SHEET FOR SURETY REVIEWS
Surety renewals happen on a fixed cycle. Knowing the cycle lets you time large AP payments, equipment purchases, and LOC draws so the balance sheet looks its strongest at review time. This isn’t financial engineering — it’s straightforward cash management. Hitting the surety review with $300K in the bank and minimal LOC is different from hitting it with $80K and the LOC near max. Same business; different read.
NOT JUST AT REVIEW TIME
Most subs check the working capital ratio once a year — when the surety asks for financials. That’s too late. The ratio moves throughout the year as jobs mobilize, material gets purchased, and the LOC fluctuates. If the ratio averaged 1.6x over the year but drops to 1.1x in Q2 because three jobs hit mill orders simultaneously, the Q2 surety renewal sees the bad number.
SPM tracks the working capital ratio as a standing line on the monthly CEO Report. Same calculation, same review cadence, every month. The ratio gets watched between surety reviews so the surety review doesn’t produce surprises. Same business, much better outcome.
The number you don’t watch is the number that surprises you at the worst time.
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