Introduction to Working-Capital Management

The management and control of working capital is of vital importance to companies and forms a major workload function of the finance manager and accountant. By working capital, the commonly accepted descriptive term for these resources, we mean the company’s investment in short-term assets; traditionally these relate to items coming under the balance-sheet heading of current assets (in practice, of course, all capital is working, whether invested in fixed or current assets). Thus inventories (stocks), accounts receivable (debtors), short-term investments and cash balances all come within the term working capital. (The words in brackets represent alternative descriptions of the asset; throughout this book these terms are used synonymously.) Apart from the efficient operation and control of these assets, the finance manager will also be concerned with their financing. In this the finance manager will be faced with numerous alternative sources, both short-term and long-term. Short-term financing is generally shown under the heading of current liabilities and includes items such as bank overdrafts and credit received from suppliers. The efficient financing of current assets by short-term liabilities also comes within the scope of working-capital management and is therefore included in the text.