Working capital management

1. Working Capital Management is…
1. Managing LIQUIDITY - Current assets : Current
Liabilities
If a firm is LIQUID it can pay short term debts + take advantage of business
opportunities (e.g… )
2. Determining the best mix of current assets and current
liabilities.
Ratio of 2:1 is accepted as appropriate, yet depends on situation.

2. Controlling Assets
 Cash
Too little – can’t pay debts
Too much – not taking advantage of growth
opportunities
 Receivables
Must check credit rating of customers
Debt collection procedure
Send out reminders
Keep records up to date
 Inventory
Cost if unsold
Too little – can’t meet increase in demand
Too much – unnecessary storage costs
Controlling Liabilities
 Payables
Take advantage of interest free periods
Must be paid to avoid extra fees
 Short term Loans
High interest rates
 Overdraft
Convenient
Cheap
Terms are negotiable with bank

3. Strategies for managing Working Capital
Leasing
 Hire, rather than purchase
 Can enable a business to increase
their no. of assets and maximise
profitability (equipment can pay for
itself through the profit it generates)
 No deposit required
Sale and lease back
 Selling assets to a lessor and then
leasing the assets back.
Attempt Q10 p.333