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Working Capital

How do we "manage" the levels of working capital required in a business?

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Please see response attached for the best formatting, which is also presented below.

RESPONSE:

1. How do we "manage" the levels of working capital required in a business?

We manage the levels of working capital through managing the cash flow cycle, as illustrated in the following diagram.

SEE DIAGRAM IN ATTACHED RESPONSE

As illustrated in the diagram above, cash flows in a cycle into, around and out of a business. It is the business's lifeblood. Therefore, it is the manager's primary task to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. Click here (see hyper link in attached response) for more information about the vital distinction between profits and cash flow. The faster a business expands, the more cash it will need ...

Solution Summary

This solution discusses how we "manage" the levels of working capital required in a business. A diagram illustrating this process is also provided. References are provided.

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