Managing Working Capital (Leaving Cert Business): Revision Notes
📚 Revision Notes
Managing Working Capital
infoNote
Liquidity refers to a companies ability to pay its short term debts as they fall due
Working Capital is current assets minus current liabilities. It is the total amount of non fixed assets a company has available after paying off all its short term debts.
Managing Working Capital
When working capital is positive, current assets (CA) are greater than current liabilities (CL). This indicates that a business has enough short-term assets to cover its short-term obligations. Conversely, when working capital is negative, current liabilities exceed current assets. This suggests the business may face difficulties in meeting its short-term liabilities with its available assets.
Options available to companies based on their Working Capital
When Working Capital is positive:
- Optimise inventory levels: Ensure inventory matches demand to prevent overstocking and free up cash. Implement inventory management systems to maintain optimal stock levels.
- Invest excess cash: Use surplus funds for short-term investments that provide liquidity while generating returns. Avoid investing excess cash in low-yield or non-essential expenditures.
When Working Capital is negative:
- Reduce inventory: Reduce inventory to release cash and minimise carrying costs. Adopt just-in-time practices to keep stock levels aligned with immediate needs.
- Explore Financing options: Explore short-term financing solutions such as overdrafts or working capital loans to bridge gaps. Consider alternative funding sources if traditional options are not available.