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Working capital is a key financial concept, which almost works around the acid test ratio of comparing the proportion between current asset and current liabilities. However, under this liquidity measurement, current assets include only the cash and its most liquid equivalent, namely, accounts receivable and short-term investments. As a quick test of the business’ true financial condition, liquidity in the strictest sense means the total amount of available cash and its equivalent to pay-off upcoming liabilities without the need to consider the selling of business inventory .
Determining the working capital, on the other hand, is about managing liquid resources. This involves the collection of receivables and the placement of short-term investments as well as the selling of inventory as a means to meet not only the current obligations but also the day-to-day operations. Hence, in managing one’s working capital, consider the measure provided by the acid-test ratio, since it is more advantageous to limit the funds placed in inventory. Otherwise, it would be difficult to run the daily operations of the business if there is a large part of the capital funds tied-up in inventory.
Now put your thinking cap on and test your financial management potentials for this key business concept.
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Managing the Working Capital of a Business
- Image: Time-Quality-Money by PurplePieman at Wikimedia under CC BY-SA 3.0
- Find Law: By Springer Steven E. and Hill, Morgan Cash Management Basics http://smallbusiness.findlaw.com/business-operations/accounting/accounting-cash-management.html