Title: Working Capital Management Definition
Headings: Working Capital Management
Working Capital Management
What Is Working Capital Management?
Key Takeaways
Working Capital
Understanding Working Capital Management
Working Capital Management Ratios
Current Ratio (Working Capital Ratio)
Collection Ratio
Inventory Turnover Ratio
Frequently Asked Questions
What Is Working Capital Management?
Why Is the Current Ratio Important?
Why Is the Collection Ratio Important?
Why Is the Inventory Ratio Important?

Content: Working capital management involves tracking the current, collection, and inventory ratios to ensure that a company operates efficiently thereby helping to maximize a company's profitability. The primary purpose is to enable the company to maintain sufficient cash flow to meet its short-term operating costs and short-term debt obligations. Working capital management helps maintain the smooth operation of the net operating cycle, also known as the cash conversion cycle (CCC)—the minimum amount of time required to convert net current assets and liabilities into cash. Why Is the Current Ratio Important? The current ratio (working capital ratio) is a company's current assets divided by current liabilities. It is a key indicator of a company's financial health as it demonstrates its ability to meet its short-term financial obligations. Current ratios of 1.2 to 2.0 are considered desirable, but a ratio higher than 2.0 may suggest that the company is not managing its working capital efficiently. Conversely, a current ratio below 1.0 generally indicates that a company's debts due in the upcoming year would not be covered by its liquid assets. Why Is the Collection Ratio Important? The collection ratio is a measure of how efficiently a company manages its accounts receivables.