Raw materials and operating supplies must be bought and stored to ensure uninterrupted production. Wages, salaries, utility charges and other incidentals must be paid for converting the materials into finished products. Customers must be allowed a credit period that is standard in the business. Only at the end of this cycle does cash flow in again.

Working Capital Management Approach

Essentially, working capital management involves:

• Ratio Analysis: Ratios such as Working Capital Ratio, Inventory Turnover Ratio and Receivables Collection Ratio can focus attention on problem areas for management action
• Managing Different Components: Specific solutions are available to manage the individual components of working capital such as inventory, receivables, cash and financing

Managing Working Capital Components

Management of associated cash inflows and outflows is the basic aim of managing each of the components. Selected solutions must result in acceptable cash flows, and also produce a return in excess of costs.

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