What is Working Capital and Working Capital Management

Working capital is a balance ratio and is the liquidity analysis of a company. It is the difference between the current assets and current liabilities. Working capital should be in a company is greater than zero. A positive working capital indicates that the total fixed assets and parts of current assets are covered by long-term capital.

The Golden balance rule is thus followed. It states that the assets and the long-term current assets should be financed by long-term capital. If that’s working capital less than zero, it is correspondingly called negative Working Capital . In this case, the risk of illiquidity of the company is higher because the current assets (current assets) are not sufficient to cover the current liabilities. In general, working capital is higher, the more secure the liquidity and thus the mobility of the company.

Working capital is a ratio of 2: 1 between current assets and current liabilities. This is based on the bankers rule, which is a “requirement of US banks, according to the current assets should be at least twice as large as current liabilities”.

Working capital but is a static balance ratio. Therefore, the significance is very limited. For example, future cash flows (revenue and expenditure) are not considered to give a wrong evaluation of the liquidity of an entity can arise. In addition, the working capital is also very strong depending on the sector.

This ratio, however, can be used to uncover optimization opportunities within the company. For example, working capital can serve as an indicator of poor storage or a bad receivables management. Of course, then other key figures and analyzes must be used to confirm or refute these conjectures. It could, for example, also be a problem in the management of liabilities, which significantly influence the outcome. In order to determine such situations, an active working capital management is required.

Working Capital Management:

Working capital management is concerned with the optimization of the ratio of working capital. This means it must ensure that “the cash available at any time for a sufficient amount” available. They achieve this goal by optimal warehousing and product range as well as an optimized receivable and payable management. For this, then cover metrics such as those used for inventories. In addition, indicators such as the average credit period, required.

To achieve optimized inventory, must inter-alia stocks are accurately controlled, the bearing assembly must be designed optimally, so that the raw materials needed to be found quickly. In addition, deliveries to reduce storage costs relevant by Just-in-Time. An optimal range of products is produced, among other, by the appropriate analysis of transit times, etc. carried out and will be adjusted accordingly for products with long transit times the manufacturing and warehousing. This capital commitment is further lowered.

Receivables management often has defects in the payment terms and the margin calls receivables. This can be optimized by an optimal reminders and credit checks. Also can be increased by appropriate means such as cash payment rate of customers. Liabilities can also be optimized through negotiations with suppliers. Here are the extension of payment terms or optimizing granted discounts at the center.

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