Working capital management
Working capital operates as a continuous cycle.
At its simplest, a creditor provides stock, the stock is then sold on credit, creating a debtor.
In due course, the debtor pays, thus providing the firm with cash resources which are then used to pay the creditor and the surplus cash is retained in the firm.
Firms can increase their financial efficiency by minimising the length of time this cycle takes. A firm that reduces its working capital cycle will reduce its working capital levels.
However, there are practical, operational and commercial limitations on how low working capital levels can fall without adversely affecting operations and relationships.
As a result, the management of working capital is essentially a compromise between levels high enough for smooth commercial operation and levels low enough to be financially efficient.