Title: How to Determine the Efficiency of a Company's Working Capital Management
Headings: How to Determine the Efficiency of a Company's Working Capital Management
How to Determine the Efficiency of a Company's Working Capital Management
Working Capital Ratio
Inventory Turnover Ratio
Collection Ratio

Content: How to Determine the Efficiency of a Company's Working Capital Management
Business Corporate Finance & Accounting
How to Determine the Efficiency of a Company's Working Capital Management
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J.B. Maverick is a novelist, scriptwriter, and published author with 17+ years of experience in the financial industry. Learn about our editorial policies
J.B. Maverick
Updated Dec 16, 2020
There are a number of tools that determine how efficiently a company is managing its working capital, principally by looking at measures of inventory and cash flow. Analysts and investors look at a company's working capital to determine its overall efficiency and financial health. Working capital is essentially the money necessary for a company to maintain its operations on a day-to-day basis. It is composed of a number of components, the three most important being: Accounts payable
Accounts receivable
Inventory levels
Accordingly, an assessment of a company's working capital management should consider the working capital ratio, the inventory turnover ratio and the collection ratio. Working Capital Ratio
The working capital ratio shows current assets divided by current liabilities and indicates to investors and analysts whether a company has the adequate short-term assets to cover its short-term obligations. A ratio that falls somewhere between 1.2 and 2.0 is generally considered satisfactory. Inventory Turnover Ratio
The inventory turnover ratio details the number of times a company sells and replaces its inventory over a given period of time. The formula for this ratio divides a company's sales by its inventory.