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Goals of Managing Working Capital

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A new computer system allows your firm to more accurately monitor inventory and anticipate future inventory shortfalls. As a result, the firm feels more able to pare down its inventory levels.

What effect will the new system have on working capital and on the cash conversion cycle?

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Solution Summary

The solution first reviews working capital calculations including examples of increasing inventory and the effects to working capital. Then there are four short paragraphs discussing real management issues with inventory: efficiency, control, holding costs, financing and the cash conversion cycle.

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First, the definition of working capital: current assets minus current liabilities.

Second, managing working capital means to understand the components of working capital, and to plan how to maximize working capital for the company. We know that inventory is one of the current assets included in the calculation and logically any increase in inventory levels will increase the net amount of working capital.

That statement is true provided the inventory doesn't have to be paid for. Once paid for ...

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