Working Capital

Topics: Investment, Asset, Finance Pages: 3 (1160 words) Published: August 28, 2013
Working capital management is crucial to a company's goals and planning function. Proper management of working capital can mean that difference between a company's ability to carry out pre-planned strategic goals and becoming stagnant and losing its competitive edge. A company's current assets typically end up being its most liquid assets, which makes them some of the most valuable when it comes to making corporate decisions. Working capital management is defined as a “managerial strategy focusing on maintaining efficient levels of both components of working capital, current assets, and current liabilities, in respect to each other” (Investopedia, 2013). Because of its special role in many aspects of the company, working capital management is crucial to the ability of a company to successfully thrive. Working capital management plays a central role in calculating the requirements of asset investment. Companies need to know how much to invest in order to provide for the financial needs of the company as well as be able to save and grow its available cash. However, there are many pitfalls to this process. Working capital is calculated as the difference between current assets and current liabilities. If a company is not able to calculate this properly, it can end up with a shortage of highly liquid assets to cover current liabilities in the case that a need to pay off any outstanding current liabilities arises. Having a negative working capital presents a huge problem because it makes the company look insolvent. It also shows that the company is not managing its working capital to its advantage in order to provide the company with the most benefit and the best use of its available and potential future asset. Financial planning is a key when it comes to smart corporate investments. Companies cannot afford to make spur of the moment decisions that can significantly affect their financial positions. Because investing decisions often involve the purchase of “assets...
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