Working Capital Management

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.