Title: Components of Working Capital (Top 4) | Detailed Explained
Headings: Components of Working Capital
Components of Working Capital
What are the Components of Working Capital?
4 Main Components of Working Capital
#1 – Trade Receivables
#2 – Inventory
#3 – Cash and Bank Balances
#4 – Trade Payables
Conclusion
Recommended Article

Content: It also includes the amount due to the bills of exchange receivable. These are the amount in which the business is owned by its customers. A crafted receivables management policy goes a long way in ensuring timely collection and avoidance of bad debts, if any, for the business. Each industry has a specific trade cycle, and businesses must ensure to keep their trade receivable cycle in line with the industry. A more extended trade receivable period will result in a delayed collection of cash, impacting the cash conversion cycle of the business. The importance of trade receivable is equally reinforced as most of the analysts while evaluating a business check receivables turnover ratio to understand the working capital management efficiency in collection of payments for credit sales undertaken by the business and also to derive bad debts incurred by the business. #2 – Inventory
Inventory is another significant part of current assets and, without a doubt, forms an integral component of working capital management. Good Inventory Management is essential since it is responsible for proper control over inventory right from the raw material stage to the finished goods stage. Inventory Management begins with inventory control and involves the timely purchase, proper storage, and efficient utilization to maintain even and orderly flow of finished goods to meet timely commitment by the business and at the same time avoid excess working capital in holding of inventory as that will result in a delay in cash conversion cycle and also increase the risk of obsolescence and increase working capital requirement which adversely impacts the profitability of the business. Inventory can be valued by business in different ways which are enumerated below: