Working Capital Components

What is Working Capital (WC)?

The difference between a company’s current assets and current liabilities. It measures short-term financial health and ability to meet day-to-day obligations.

What are the components of Current Assets?

Cash, accounts receivable, inventory, and short-term investments.

What are the components of Current Liabilities?

Accounts payable, short-term debt, and accrued expenses.

What is Gross Working Capital?

The total amount of current assets a company holds.

What is Net Working Capital?

Current assets minus current liabilities.

What does Effective Working Capital Management aim to balance?

Liquidity and profitability.

What is the Liquidity Principle in Working Capital Management?

Maintain sufficient current assets to meet short-term obligations and avoid stockouts or cash shortages.

What is the Profitability Principle in Working Capital Management?

Invest in current assets efficiently to maximize return and avoid excessive cash or inventory that reduces profitability.

What does the Risk-Return Trade-Off in Working Capital Management mean?

Higher liquidity reduces risk but may lower returns, while aggressive financing increases profitability but adds risk.

What is the Matching (Maturity) Principle in Working Capital Management?

Finance short-term assets with short-term funds and long-term assets with long-term funds.

What aspects of business does Working Capital Management affect?

Liquidity management, investment in current assets, financing policies, profitability, and operational efficiency.

What is the role of Liquidity Management in Working Capital Management?

Ensures that day-to-day operational cash flow is maintained to meet short-term obligations.

What is the role of Investment in Current Assets in Working Capital Management?

Involves decisions about cash, receivables, and inventory levels to optimize operational flow.

What is the role of Financing Policies in Working Capital Management?

Decides how to fund current assets, whether through short-term debt, long-term debt, or equity.

How does Working Capital Management affect Profitability?

Optimal management of working capital improves the company’s return on investment.

How does Working Capital Management impact Operational Efficiency?

It influences production, sales, and supply chain performance by ensuring proper cash and inventory flow.

What is the focus of Working Capital Management applications?

Planning and controlling current assets and liabilities to maintain balance between liquidity and profitability.

What is Cash Management in Working Capital?

Maintaining adequate cash for operations while avoiding idle cash that could result in opportunity cost.

What is Receivables Management in Working Capital?

Setting credit policies, determining customer credit terms, minimizing bad debts, and maximizing sales.

What is Inventory Management in Working Capital?

Determining optimal inventory levels to meet demand and avoid overstocking or understocking.

What is a Conservative Policy for Current Asset Investment?

Maintaining high current assets to minimize risk, though it results in lower profitability.

What is an Aggressive Policy for Current Asset Investment?

Maintaining low current assets to maximize profitability, though it increases risk.

What is a Moderate Policy for Current Asset Investment?

A balanced approach between risk and return.

What is a Conservative Financing Policy for Current Assets?

Financing both permanent and temporary assets mostly with long-term funds; it has low risk but higher financing cost.

What is an Aggressive Financing Policy for Current Assets?

Financing part of permanent assets with short-term funds; it has lower cost but higher liquidity risk.

What is the Matching (Hedging) Approach in Financing Current Assets?

Matching asset duration with liability duration to achieve an optimal balance between risk and cost.

What is the Cash Conversion Cycle (CCC)?

A key tool for managing efficiency in cash flow by measuring how quickly a company converts resources into cash.

What are the key takeaways from Working Capital Management?

Working capital is crucial for short-term solvency and profitability. Investment and financing policies directly affect liquidity, risk, and return. The Cash Conversion Cycle is essential for monitoring and improving cash flow efficiency.