Business Working Capital Management Guide
Components, strategies, ratios, and risks.
Working Capital Components
Current assets
Items: Cash, receivables, inventory
Purpose: Operating resources
Current liabilities
Items: Payables, short-term debt
Purpose: Operating obligations
Working capital
Items: Assets minus liabilities
Purpose: Operating buffer
Net working capital
Items: Adjusted working capital
Purpose: True liquidity
Management Strategies
1. Optimize cash balance
2. Accelerate collections
3. Manage inventory levels
4. Negotiate payment terms
5. Use credit facilities
6. Forecast cash needs
7. Monitor liquidity ratios
8. Control credit extension
9. Streamline payables
10. Balance working capital
Key Ratios
Current ratio
Formula: Current assets/Current liabilities
Target: Above 1.5
Quick ratio
Formula: (Cash+Receivables)/Liabilities
Target: Above 1.0
Cash conversion cycle
Formula: DSO+DIO-DPO
Target: Minimize days
Working capital turnover
Formula: Revenue/Working capital
Target: Maximize ratio
Common Risks
1. Liquidity crisis
2. Cash flow mismatch
3. Collection delays
4. Inventory buildup
5. Credit extension risks
6. Supplier payment issues
7. Seasonal fluctuations
8. Growth capital needs
Working Capital Checklist
1. Optimize cash balance carefully. 2. Accelerate collections aggressively. 3. Manage inventory levels efficiently. 4. Negotiate payment terms strategically. 5. Use credit facilities wisely. 6. Forecast cash needs accurately. 7. Monitor liquidity ratios regularly. 8. Control credit extension prudently. 9. Streamline payables efficiently. 10. Balance working capital continuously. Working capital management = operational liquidity. Cash optimized. Collections accelerated. Inventory managed. Terms negotiated. Facilities used. Needs forecasted. Ratios monitored. Credit controlled. Payables streamlined. Capital balanced.