24 Working capital and liquidity management
‘Turnover is vanity, profit is sanity and cash is reality’
Popular saying in finance
In a nutshell
While the medium- to long-term goal of a business is to manage profitability, the short-term goal should be to manage liquidity.
Liquidity is the ability to pay expenses and debts as and when they become due. Businesses must ensure they have sufficient liquidity in the form of cash by managing their ‘working capital’.
Working capital is the difference between current assets (stock, debtors and cash) and current liabilities (creditors and bank overdrafts). Working capital management is the ability to make cash available when needed and to make the best use of surplus cash. Too little cash in the business ...
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