Working Capital Management

CHAPTER 1 Concepts in Working Capital Management

This chapter covers these topics:

• Explanation of the basic concepts of working capital.
• Appreciation for the problems in assigning management responsibility for working capital.
• Consideration of traditional and modern ideas of working capital management.
• Understanding the essential focus of cost in working capital management.
• Applying working capital concepts to a successful company (Best Buy).

WORKING CAPITAL is the arithmetic difference between two balance sheet aggregated accounts: current assets and current liabilities. This calculation is done in a currency, such as U.S. dollars, which is the convention we will be using in this book.

WORKING CAPITAL CONCEPTS

Both current assets and current liabilities are composed of several ledger accounts, as shown in italics in the Exhibit 1.1 balance sheet. For the company presented in this balance sheet—we'll call it the Rengas Company—the amount of working capital in 2013 was $42.5 million, calculated as current assets ($65 million) less current liabilities ($22.5 million).

Description of Working Capital Accounts

The accounts noted in italics in Exhibit 1.1 are briefly explained next, with chapters of this book devoted to appropriate management procedures.

• Cash accounts and short-term investments. These account categories include cash on hand and in bank accounts, and any short-term investments that are expected to be turned into cash within one year. We'll review the management ...