What is Working Capital Management?
Working capital management is defined as the relationship between a company’s short-term assets and commitments. It tries to ensure that a company’s day-to-day operational expenses can be met while simultaneously investing its resources in the most profitable way possible. Management of working capital is mainly about making sure that a business has enough cash flow to pay its short-term debts and cover its short-term running costs. The current assets minus the current bills of a business make up its working capital. Anything that can be easily turned into cash within a year is considered a current asset. These are the company’s assets that can be quickly sold. Cash, accounts due, inventory, and short-term investments are all examples of current assets. Current liabilities are debts that are due within the next 12 months. Some examples are accruals for operational expenses and current parts of payments on long-term debt.
Geeky Takeaways
- Managing a company’s working capital means keeping an eye on its assets and debts to make sure it has enough cash flow to pay its short-term debts and short-term operating expenses.
- Taking care of cash, inventory, accounts receivable, and accounts payable are the main parts of managing working capital.
- Managing working capital means keeping an eye on several ratios, such as the working capital ratio, the collection ratio, and the inventory ratio.
- By making good use of a company’s resources, working capital management can help it control its cash flow and make more money.
- Strategies for managing working capital might not work because of changes in the market, or they might give up long-term triumphs for immediate benefits.
Table of Content
- Objectives of Working Capital Management
- Why is Working Capital Management Important?
- Factors that Affect Working Capital Needs
- Types of Working Capital
- Components of Working Capital Management
- Why Manage Working Capital?
- Working Capital Management Ratios
- Limitations of Working Capital Management
- How to Improve Working Capital Management?
- Frequently Asked Questions (FAQs)