Working capital management

Definition

Working capital management involves managing a company's short-term assets and liabilities to ensure it has sufficient liquidity to meet its operational needs. Effective working capital management helps maintain smooth business operations and improves financial stability.

5 Must Know Facts For Your Next Test

1. Working capital is calculated as current assets minus current liabilities.
2. Effective working capital management can improve a company’s profitability and cash flow.
3. Key components include inventory management, accounts receivable, and accounts payable.
4. Poor working capital management can lead to liquidity problems and financial distress.
5. Techniques such as the cash conversion cycle help manage the time between outlaying cash for raw material and receiving cash from sales.

Review Questions

• How do you calculate working capital?
• Why is effective working capital management important for a business?
• What are the key components involved in managing working capital?

Related terms

Current Assets:

Assets that are expected to be converted into cash or used up within one year.

Current Liabilities:

Obligations that are due to be settled within one year.

Cash Conversion Cycle:

A metric that measures the time taken between outlaying cash for inventory and receiving cash from sales of goods.