If Cash Is King, then Working Capital Is God

If Cash Is King, then Working Capital Is God

September 28, 2012

Management of a company’s working capital is crucial for day-to-day functioning and long-term survival

Working capital management is the most important management activity in emerging and mid-sized companies because of the significant financial impact that it has on the company’s well-being. While most CEOs and business owners have heard and accept that “Cash is King,” working capital is often the least understood and most poorly managed area of their companies.

When working capital is not adequately managed, the deterioration of cash flow critically affects a company’s ability to fund operations, reinvest in the business and, ultimately, to survive. With adequate working capital management, cash flow supports a company that thrives in the marketplace.

‘Working Capital’ Defined

Working capital for business is often referred to as simply the excess of short-term assets over short-term liabilities. Short-term assets include cash and other assets expected to be turned into cash within one year: marketable securities, accounts receivable, short-term notes receivable, inventory and prepaid expenses. Short-term liabilities include those expected to be paid with cash within one year: accounts payable, short-term debt such as credit lines, the short-term portion of long-term debt and accrued expenses.

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Article appeared in the October 2012 issue.