Working Capital Management
- Working capital is the funds available for the short term financial commitments of a business.
- Short-term liquidity is important for businesses. It means a business can take advantage of:
- Opportunities when they arise, maximising profit
- Meet short-term financial obligations
- Pay tax
- Meet payments on loans and overdrafts
Working capital equation = Current assets – current liabilities
- Working capital management is determining the best mix of current assets and current liabilities needed to achieve the business’s objectives.
Current (working capital) ratio = Current assets ÷ current liabilities
- Ratio used to determine assets in relation to liabilities.
- Businesses should have roughly twice the amount of current assets to current liabilities in order to have a healthy liquidity ratio.
Extract from Business Studies Stage 6 Syllabus. © 2010 Board of Studies NSW.