Working capital management deals with managing current assets (cash, inventory, receivables) and current liabilities (payables, short-term credit) to ensure smooth operations. The main goal is to balance:
Most exam questions test definitions + operating cycle + key policies (cash/inventory/receivables).
You should be able to:
Working capital refers to funds invested in current assets required for day-to-day operations.
Common definitions:
Net working capital indicates liquidity cushion.
Working capital is needed to:
Too little WC → production stops, loss of goodwill.
Too much WC → idle funds, lower profitability.
Operating cycle is the time gap between: cash paid for purchases/expenses and cash collected from sales.
Flow (write/draw): Cash → Raw material → WIP → Finished goods → Debtors/Receivables → Cash
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Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.
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Working capital management deals with managing current assets (cash, inventory, receivables) and current liabilities (payables, short-term credit) to ensure smooth operations. The main goal is to balance:
Most exam questions test definitions + operating cycle + key policies (cash/inventory/receivables).
You should be able to:
Working capital refers to funds invested in current assets required for day-to-day operations.
Common definitions:
Net working capital indicates liquidity cushion.
Working capital is needed to:
Too little WC → production stops, loss of goodwill.
Too much WC → idle funds, lower profitability.
Operating cycle is the time gap between: cash paid for purchases/expenses and cash collected from sales.
Flow (write/draw): Cash → Raw material → WIP → Finished goods → Debtors/Receivables → Cash
Shorter operating cycle generally reduces working capital requirement.
Operating cycle (in days) is typically: OC = Inventory holding period + Receivables collection period − Payables deferral period
Basic components:
Mini table:
Exam line: “The objective is to maintain optimum working capital—neither excessive nor inadequate.”
Goals of cash management:
Typical tools:
Inventory management aims to ensure:
EOQ (concept):
EOQ is the order quantity that minimises total inventory cost (ordering + carrying).
(Derivation may not be required; mention the trade-off.)
Receivables policy decisions:
Key idea: More credit increases sales but increases bad debt risk and blocks funds.
From this topic
Gross vs net working capital:
Thus, net working capital is more closely linked to liquidity.
Operating cycle is the cash-to-cash time:
Flow: Cash → Inventory → Receivables → Cash
Components:
So: OC = Inventory days + Receivables days − Payables days (basic).
Cash management aims to maintain adequate liquidity for transactions and precautionary needs while minimising idle cash.
Effective cash management reduces financing cost and improves operating efficiency.