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5-1 activity Working capital management

5-1 activity Working capital management

Q Working capital management is critical to an organization’s ability to meet its short-term obligations. When proposing new projects or investment ideas for corporations, it is critical to consider working capital red flags such as excess credit use by the business or a low cash balance. Managing such issues early on can help corporations acquire a competitive advantage in the marketplace.

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Working capital is stated as the difference between the current asset and the current liability of the given firm. A current asset is equal to cash, accounts receivables, inventory and marketable securities, and other assets that can be turned into cash in less than a year and current liabilities include accounts payables, short term debts, wages, taxes, the current amount of the long term debt and other items due within a year. Working capital measures the liquidity of the given firm, operational efficiency, and short-term financial health of the company (Boisjoly, Conine & McDonald, 2020). If the company’s current asset is lower than that of the current liability, then the calculated working capital is negative and the firm has liquidity issues. Thus it is not a good idea to invest in that firm, which is suffering from liquidity crisis and operational inefficiencies. On the other hand when the current asset of the firm is greater than a current liability, working capital is positive and it shows a positive impact for the investors to invest in the firm.