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: To operate with maximum efficiency and maintain a comfortably high level of working capital, a company must keep sufficient inventory on hand to meet customers' needs while avoiding unnecessary inventory that ties up working capital. Companies typically measure how efficiently that balance is maintained by monitoring the inventory turnover ratio. The inventory turnover ratio, calculated as revenues divided by inventory cost, reveals how rapidly a company's inventory is being sold and replenished. A relatively low ratio compared to industry peers indicates inventory levels are excessively high, while a relatively high ratio may indicate inadequate inventory levels. Frequently Asked Questions
What Is Working Capital Management? 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.