Working Capital
- Tags
- finance
Capital is \(Assets - Liabilities\).
Working capital is \(Current Assets - Current Liabilities\).
Working Capital Management
Good WC management means a company can pay its debts as the fall due. A business that fails to do this will go bankrupt.
[see page 21, Involves]:
- not holding too much inventory for too long (see holding-period).
- Good collection policy. Get payment ASAP from customers (see Collection Period).
- Prompt Payment. Pay Suppliers on time and too contract (see payment period).
Bad WC management can lead to overdrafts.
Working Capital Funding
The major internal forms of short term finance are tighter credit control,
reducing inventory levels and delaying payment to trade payables (suppliers).
All of these can affect relationships with suppliers.
Businesses should reduce delays to collect cash from customers, taking into account the competitors practices and customers needs. Inventory should neither be too large to (be a wasted expense) nor too small to meet demand.