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vvvvvvvvvvvvvv These are three main components associated with working capital
management:
1. Accounts Receivable
Accounts receivable are revenues due—what customers and debtors owe to a company for
past sales. A company must collect its receivables in a timely manner so that it can use those
funds to meet its own debts and operational costs. Accounts receivable appear as assets on a
company's balance sheet, but they do not become assets until they are collected. Days sales
outstanding is a metric used by analysts to assess a company's handling of accounts
receivables. The metric reveals the average number of days a company takes to collect sales
revenues.
2. Accounts Payable
Accounts payable is the amount that a company must pay out over the short term and is a key
component of working capital management. Companies endeavor to balance payments with
receivables to maintain maximum cash flow. Companies may delay payments as long as is
reasonably possible with the goal of maintaining positive credit ratings while sustaining good
relationships with suppliers and creditors. Ideally, a company's average time to collect
receivables is significantly shorter than its average time to settle payables.
3. Inventory
Inventory is a company's primary asset that it converts into sales revenues. The rate at which
a company sells and replenishes its inventory is a measure of its success. Investors also
consider the inventory turnover rate to be an indication of the strength of sales and how
efficient the company is in its purchasing and manufacturing. Low inventory means that the
company is in danger of losing out on sales, but excessively high inventory levels could be a
sign of wasteful use of working capital.
Working Capital Management in a Nutshell
Working capital management represents the relationship between a firm's short-term assets
and its short-term liabilities. The goal of working capital management is to ensure that a
company can afford its day-to-day operating expenses while, at the same time, investing the
company's assets in the most productive way. A well-run firm manages its short-term debt
and current and future operational expenses through its management of working capital, the
components of which are inventories, accounts receivable, accounts payable, and cash.
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