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 can improve a company's earnings and profitability through efficient use of its resources. 1:58
Working Capital
Understanding Working Capital Management
The primary purpose of working capital management is to enable the company to maintain sufficient cash flow to meet its short-term operating costs and short-term debt obligations. A company's working capital is made up of its current assets minus its current liabilities. Current assets include anything that can be easily converted into cash within 12 months. These are the company's highly liquid assets. Some current assets include cash, accounts receivable, inventory, and short-term investments. Current liabilities are any obligations due within the following 12 months. These include operating expenses and long-term debt payments. Working capital management commonly involves monitoring cash flow, current assets, and current liabilities through ratio analysis of the key elements of operating expenses, including the working capital ratio, collection ratio, and inventory turnover ratio. 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.