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Working capital is crucial for a company's ability to meet short-term obligations with its assets. It involves managing current assets and liabilities to ensure financial stability and operational efficiency. Effective strategies include optimizing inventory, managing receivables and payables, and choosing the right financing sources. Understanding the working capital cycle and net working capital is key to maintaining a healthy cash flow and supporting business growth.
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Working capital is calculated by subtracting current liabilities from current assets
Current Assets
Current assets are resources that can be converted into cash within one year
Current Liabilities
Current liabilities are obligations that must be settled within one year
Working capital is crucial for a company's financial stability and operational efficiency
Strategies include optimizing inventory levels, accelerating receivables, and using short-term financing options
Working Capital Cycle
The working capital cycle measures the time it takes for a company to convert resources into cash flows
Net Working Capital
Net working capital is the difference between current assets and liabilities, providing a snapshot of a company's ability to sustain operations
Companies can secure working capital through internal operations or external financing options
Adequate working capital is necessary for a company to meet its immediate financial obligations and maintain a strong credit standing
Strategic management of working capital is integral to a company's long-term success and ability to seize growth opportunities