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Financial wellness: payments 3 min read

Financial Wellness Indicator: A business' ability to pay

One sign of a healthy business is having sufficient cash to cover its short-term obligations.  

It quite literally pays to have good cash flow. After all, as the old saying goes, you need to spend money to make money.


One of the signs of a healthy business is whether it’s generating enough cash to cover off all its debts in a given year. Not only that, a business’ ability to spend money impacts its ability to get money from a financial institution in the form of credit.


So, let’s get this indicator working for you. Here, we give a breakdown of what makes it tick, how it can help your business thrive, and how your bank can be a partner in that success. And of course, we’ll seek the two cents of a CWB expert along the way.


Ability to pay


Factors that affect it: Access to capital through a line of credit is a big one as this obviously has impacts on your cash flow. So, having a good track record when it comes to your current loan or credit payments – and in general having a good relationship with your bank – is important.


How you measure it: Current ratio. 


“The Current Ratio is one of the most common financial ratios to measure the liquidity of a company, or its ability to pay short-term obligations,” says Aaron Drever, Assistant Vice-President, Sales Effectiveness who spent years as a cash management expert in his previous role. “This ratio measures the company’s current assets (which can be quickly turned into cash) versus its current liabilities (which are all the debts that are due within 12 months).”


How you calculate it:


Current Assets
(cash, accounts receivable, inventory)



Current Liabilities
(accounts payable, wages, taxes payable, short-term debt,
other debt payments required in the coming 12 months)



What the calculation tells you: A Current Ratio lower than 1.00 indicates the company has more debt due in the coming 12 months than cash available to pay it. A Current Ratio of 1.20 or more greater is considered healthy to ensure the business has enough cashflow for unforeseen events.


How this impacts your business banking:

“Banks commonly look at the Current Ratio when making decisions on issuing a line of credit,” says Drever. “We need to ensure applicants have the ability to pay us back. And that means confirming they can generate more revenue than what they owe.”

Common challenges:
Cyclical businesses


“Cyclical businesses can have a poor Current Ratio at certain times of the year,” says Drever. “For example, a construction company that works through the summer, fall, and winter, but is unable to generate revenue in the spring when the ground is thawing and it’s too wet to work. If we calculated a Current Ratio in the spring, it could look like they don’t generate enough revenue, however in the other three seasons the company could look very strong.”


Other business that can experience cyclical cash flow include:

  • Oil field-related companies: ability to do work is dependent on weather conditions
  • Retail: holiday season rush for stores; certain busier times of the year for restaurants
  • Professional services: accountants are busier at tax time; service providers like dentists, chiropractors, and massage therapists can see an influx at the end of the calendar year as people use up their annual benefit allotments.


Often a bank will accommodate for these seasonal swings when setting up covenants for these types of clients. (Hint: Covenants are promises in a formal debt agreement that certain activities will or will not be carried out or that certain thresholds will be met).


Unique considerations for small- vs medium-sized business owners: Resources and expertise for managing payables.


“For small businesses it’s often the owner who’s the main employee and the one managing the finances. However, a mid-size business may be able to hire accounting staff to help ensure everything is paid on time and manage the day-to-day banking,” says Drever. “In either case, it pays to reach out to your local CWB Banking Centre to speak to our Commercial and Cash Management staff. They’ll be able to tailor a solution specific to your business’ needs.”


CWB solutions that support a business’ ability to pay:


Line of Credit

Wire services

Customer Automated Funds Transfer (CAFT)

Cash Management

Business Accounts