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Chapter 7
The elements of working capital
Working capital is the capital available for conducting the day-to-day operations of an
organisation; normally the excess of current assets over current liabilities.
Working capital management is the management of all aspects of both current assets
and current liabilities, to minimise the risk of insolvency while maximising the return
on assets.
Current assets require funding – consider reducing funding levels
e.g. cash to buy inventory, cash delayed in from offering credit
Current liabilities provide funding – consider increasing levels
e.g. cash delayed out from accepting credit from supplier
Investing in working capital has a cost:
the cost of funding it, or
the opportunity cost of lost investment opportunities because cash is tied up in
working capital and unavailable for other uses.
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