Working capital management is a business tool that helps companies effectively make

use of current assets, helping companies to maintain sufficient cash flow to meet short
term goals and obligations.

Working capital is essential to the health of every business, but managing it effectively
is something of a balancing act. Companies need to have enough cash available to
cover both planned and unexpected costs, while also making the best use of the funds
available. This is achieved by the effective management of accounts payable, accounts
receivable, inventory and cash.
 
Frequently Asked Questions
What Is Working Capital Management?
Working capital management involves tracking the current, collection, and
inventory ratios to ensure that a company operates efficiently thereby helping to
maximize a company's profitability. The primary purpose is to enable the
company to maintain sufficient cash flow to meet its short-term operating costs
and short-term debt obligations. Working capital management helps maintain the
smooth operation of the net operating cycle, also known as the cash conversion
cycle (CCC)—the minimum amount of time required to convert net current assets
and liabilities into cash.
Why Is the Current Ratio Important?
The current ratio (working capital ratio) is a company's current assets divided by
current liabilities. It is a key indicator of a company's financial health as it
demonstrates its ability to meet its short-term financial obligations. Current ratios
of 1.2 to 2.0 are considered desirable, but a ratio higher than 2.0 may suggest
that the company is not managing its working capital efficiently. Conversely, a
current ratio below 1.0 generally indicates that a company's debts due in the
upcoming year would not be covered by its liquid assets.
Why Is the Collection Ratio Important?
The collection ratio is a measure of how efficiently a company manages its
accounts receivables. It is calculated as the product of the number of days in an
accounting period multiplied by the average amount of outstanding accounts
receivables divided by the total amount of net credit sales during the accounting
period. Essentially, this ratio shows how effective a company is at collecting
payment after a sales transaction on credit. The lower a company's collection
ratio, the more efficient its cash flow.
Why Is the Inventory Ratio Important?
To operate with maximum efficiency and maintain a comfortably high level of
working capital, a company must keep sufficient inventory on hand to meet
customers' needs while avoiding unnecessary inventory that ties up working
capital. The inventory turnover ratio, calculated as revenues divided by inventory
cost, reveals how rapidly a company's inventory is being sold and replenished.
An abnormally low ratio compared to industry peers indicates inventory levels are
excessively high, while an abnormally high ratio may indicate inadequate
inventory levels.
 
EFFECTIVE WORKING CAPITAL (SLIDE 14)
Effective working capital management therefore means taking steps to improve the
company’s working capital position without triggering adverse consequences elsewhere
in your supply chain. This might include reducing DSO by putting in place more efficient
invoicing processes, so that customers receive your invoices sooner. Or it might mean
adopting an early payment program that enables your suppliers to receive payment
sooner than they would otherwise.
 
SLIDE 15
Companies can use a wide range of solutions to support effective working capital
management, both for themselves and for their suppliers. These include:

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important-company.asp
Proper management of working capital is essential to a company’s fundamental
financial health and operational success as a business. A hallmark of good
business management is the ability to utilize working capital management to
maintain a solid balance between growth, profitability and liquidity.
A business uses working capital in its daily operations; working capital is the
difference between a business's current assets and current liabilities or debts.
Working capital serves as a metric for how efficiently a company is operating and
how financially stable it is in the short-term. The working capital ratio, which
divides current assets by current liabilities, indicates whether a company has
adequate cash flow to cover short-term debts and expenses.
KEY TAKEAWAYS
 The goal of working capital management is to maximize operational
efficiency.
 Efficient working capital management helps maintain smooth operations
and can also help to improve the company's earnings and profitability.
 Management of working capital includes inventory management and
management of accounts receivables and accounts payables. 

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important-company.asp

SLIDE 17
Proper management of working capital is essential to a company’s
fundamental financial health and operational success as a business. A
hallmark of good business management is the ability to utilize working
capital management to maintain a solid balance between growth,
profitability and liquidity.
A business uses working capital in its daily operations; working capital is
the difference between a business's current assets and current liabilities or
debts. Working capital serves as a metric for how efficiently a company is
operating and how financially stable it is in the short-term. The working
capital ratio, which divides current assets by current liabilities, indicates
whether a company has adequate cash flow to cover short-term debts and
expenses.
KEY TAKEAWAYS
 The goal of working capital management is to maximize operational
efficiency.
 Efficient working capital management helps maintain smooth
operations and can also help to improve the company's earnings and
profitability.
 Management of working capital includes inventory management and
management of accounts receivables and accounts payables.