Working capital - Essay Example

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Working capital

Companies that successfully manage its working capital do not face liquidity issues and in turn can focus on other aspects of the business (Investopedia, 2013) . Positive working capital is imperative for a company to ensure that it sustains its operations. Working capital of a company is the difference between its current assets and its current liabilities (Watson & Head, 2013). Current assets of a company may include cash, inventory, accounts receivables and prepaid expenses while current liabilities include short term borrowings and accounts payable. Thus, working capital is an indicator of assessing the company's liquidity and higher the working capital of the company, greater the liquidity of the company. A company requires raw materials to produce the goods it wants to sell. When these raw materials of finished goods are produced, these are either converted into finished goods (for a manufacturer) or sold to customers (for retailers). If the sale is made on credit, the company does not receive any cash and an account receivable is created. The sale is complete when this account receivable is converted into cash. Working capital is the requirement of the company to purchase the raw materials until the raw materials are converted into cash. The number of days required to convert raw materials into cash is called a company's cash cycle and higher the company's cash cycle, higher is the company's working capital requirement. ...Show more

Summary

The short term assets and liabilities of a company i.e. Current Assets and current liabilities are an important determinant of a company's operational performance. Hence a company should pay a lot of attention to managing its current assets and current liabilities in order to remain in the business in a profitable manner. …
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