Minimizing Working Capital

Topics: Balance sheet, Generally Accepted Accounting Principles, Accounts receivable Pages: 4 (1200 words) Published: December 12, 2012

Working capital is the key to a successful business. It is like their blood flow and the manager’s job is to help keep it flowing. Under the Generally Accepted Accounting Principles working capital is simply the difference between a company’s Current Assets, which are cash, inventory, accounts receivable and prepaid items, and Current Liabilities, accounts payable and accrued expenses. Working capital is of major importance to a business because it controls the current day-to-day operations including payment of salaries, wages, inventory, raw materials, other business expenses, purchase of stocks, buildings, land, fixed assets, etc. A business firm must maintain an adequate level of working capital in order to run its business smoothly. It is worthy to note that both excessive and inadequate working capital positions are bad for business. Working capital is the heart of business. If it does not exist than the business cannot survive. You cannot run a business without proper working capital. As a business owner, you must constantly be alert to changes in working capital and their implications, if you don’t you might miss some of the warning signs and it can lead to the loss of business. The most important component of working capital and the most important asset of a business is cash. Without cash a business will go under. That is why it is so vital for a business to have control over all cash transactions. Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable, inventory). If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. This can lead to bankruptcy. A declining working capital over a longer time could also be a red flag that warrants further...
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