Working Capital Management
Topic 5.1.2 | The Lifeblood of Business Operations
📚 The Strategic Foundation
💡 Definition:
Money available for day-to-day operations. The fuel that keeps the business engine running.
🧮 Formula:
Current Assets - Current Liabilities
(Cash + Stock + Debtors) - (Creditors + Overdraft)
The Working Capital Cycle
⚡ Strategic Goal: SHORTEN THE CYCLE
Faster cycle = Less cash tied up = Better liquidity = More growth opportunities
Cash Outflow
Purchase Raw Materials
Work In Progress
Production Phase
Sale Made
Goods Sold on Credit
Cash Inflow
Customer Payment Received
Current Cycle Speed:
60 days
Industry Average: 45-75 days
The Finance Manager's Challenge
Cash Position
$50,000
↑ Strong
Working Capital
$10,000
↑ Improving
Scenario 1: Supplier Payment Terms
Working Capital Calculator
Current Assets
Total Current Assets
$60,000
Current Liabilities
Total Current Liabilities
$50,000
📊 Financial Position Analysis
Net Working Capital
$10,000
Assets - Liabilities
Current Ratio
1.20 : 1
Optimal: 1.5 - 2.0
Liquidity Status
HEALTHY POSITION
💡 Strategic Interpretation:
✅ HEALTHY: Adequate working capital for day-to-day operations. The business can meet short-term obligations comfortably. Focus on maintaining this position through effective debtor/creditor management.
🎯 Management Priorities:
- Debtors: Chase payments faster (reduce days to 30 or less)
- Creditors: Negotiate longer payment terms (extend to 60 days)
- Stock: Minimize holding period (implement JIT if possible)
- Cash: Optimize balance between liquidity and opportunity cost
🎓 Cambridge International AS & A Level Business (9609)
Topic 5.1.2: Working Capital Management | Strategic Finance Operations
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