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Working capital is a business accounting term referring to the liquid assets immediately accessible to a company. Working capital management is the practice of researching and planning a company's assets, debts and incoming cash flow to ensure that the organization has enough capital to operate. Working capital is essential for everything from payroll to purchasing. Managing this money is broken down into four distinct fields: cash management, inventory management, debtors management and short-term financing.
One of the major challenges in working capital management is ensuring there are enough liquid assets to meet regularly scheduled financial needs. This money is used to purchase more goods, pay off debts and meet the regular payroll. Managers also must reserve money for any emergencies befalling a company, such as repair work or lawsuits.
The basic equation for calculating a company's working capital is rather simple and is the basis for working capital management. In order to determine working capital, an accountant needs only to subtract an organization's current liabilities from its current assets. The resulting number will give an idea of how much liquid money is not tied up in property, stock and other investments.
Working capital management involves looking at these numbers and using them to plan a company's short-term future. This usually means ensuring that there is cash for the next one-year period but also making sure that these numbers are reversible. This means that these financial plans can be reorganized or removed completely if there is not enough capital.
In order to properly plan for the next fiscal year, working capital management is broken down into the fields of cash management, inventory management, debtors management and short term financing. Cash management simply is the managerial accounting strategy of constantly monitoring a company's cash status as money comes in and goes out on a daily basis. Inventory management involves applying techniques to increase efficiency in production in order to reduce overhead, such as a shoe company ordering bulk amounts of laces in order to get discounted rates, then storing the laces for future shoes. Debtors management involves identifying appropriate credit policies that will attract customers and ensure regular income from payments. Short-term financing is the ability to seek out bank loans that can bridge a financial gap for a short period of time and can be repaid quickly.
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