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Determining an optimum amount of working capital

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How does a company determine an optimum amount of working capital it should maintain? Explain the factors which detract from this amount and the factors which add to this amount?

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Solution Summary

The solution explains the concept by using five examples of situations that would influence the amount of optimum working capital a company needs. Following the examples are two lists of types of transactions that would increase or decrease working capital amounts.

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What is considered 'optimum' working capital will be determined by the type of business and the style of cash management by employees who would have control over such things. Following are some examples:

1. In one definition, optimum might be described as the amount of working capital needed to meet current obligations based on a projected monthly cash budget without having to borrow on a short term basis.

2. In the case of Microsoft, for example, optimum working capital might be an ...

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