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: 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. It is calculated as the product of the number of days in an accounting period multiplied by the average amount of outstanding accounts receivables divided by the total amount of net credit sales during the accounting period. Essentially, this ratio shows how effective a company is at collecting payment after a sales transaction on credit. The lower a company's collection ratio, the more efficient its cash flow. Why Is the Inventory Ratio Important? 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.