Working Capital

Working capital is a key indicator of financial health, so managing working capital is essential. To manage working capital the owner or manager must be alert constantly to changes of working capital accounts.

There are components: First cash and equivalence. Ask yourself; are cash levels adequate to cover expenses and what bank borrowing will be necessary? Second, accounts receivable. Is the relationship between receivables and sales appropriate? How rapidly are receivables being collected? Third, inventories. Is inventory level reasonable? What actions need to be taken to decrease or increase inventory. Fourth, accounts payable. Is the money owed to suppliers at a reasonable level? Finally, notes payable to banks or other lenders. Is the debt appropriate in relation to the equity of the company?