The Importance of Managing Working Capital
Working capital is defined for accounting purposes to be the difference between current assets and current liabilities. The term “current” applies to those balance sheet items the turnover or mature within twelve months.So, why is managing working capital so important? While operating profitability is the key to the long-term prosperity of an organization, the availability of operating cash supports the organization’s ability to operate efficiently. Allowing excess levels of working capital to exist can constrict an organization’s flow of cash to meet current obligations.
Typical problems that exist when analyzing an entity’s working capital are: excess or slow-moving inventory, significant levels of past due or uncollectible accounts receivable and improperly structured bank financing.Methods of managing working capital, then, are the implementation of management reporting systems that measure the levels and changes in these key areas. Examples of indicators that are typically used to monitor this performance are current ratios, quick ratios, inventory turnover ratios, days sales in inventory (DSI) and days sales outstanding (DSO).
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