What is 'Working Capital Management (WCM)'
Working capital management refers to a company's managerial accounting strategy designed to monitor and utilize the two components of working capital, current assets and current liabilities, to ensure the most financially efficient operation of the company. The primary purpose of working capital management is to make sure the company always maintains sufficient cash flow to meet its shortterm operating costs and shortterm debt obligations.
BREAKING DOWN 'Working Capital Management (WCM)'
Working capital management commonly involves monitoring cash flow, assets, and liabilities through the ratio analysis of key elements of operating expenses, including the working capital ratio, collection ratio, and the inventory turnover ratio. Efficient working capital management helps maintain the smooth operation of the operating cycle (the minimum amount of time required to convert net current assets and liabilities into cash) and can also help to improve the company's earnings and profitability. Management of working capital includes inventory management and management of accounts receivables and accounts payables. The main objectives of working capital management include maintaining the working capital operating cycle and ensuring its ordered operation, minimizing the cost of capital spent on the working capital, and maximizing the return on current asset investments.
Elements of Working Capital Management
The working capital ratio, calculated as current assets divided by current liabilities, is considered a key indicator of a company's fundamental financial health since it indicates the company's ability to successfully meet all of its shortterm financial obligations. Although numbers vary by industry, a working capital ratio below 1.0 is generally indicative of a company having trouble meeting its shortterm obligations. Working capital ratios of 1.2 to 2.0 are considered desirable, but a ratio higher than 2.0 may indicate a company is not effectively using its assets to increase revenues.
The collection ratio, also known as the average collection period ratio, is a principal measure of how efficiently a company manages its accounts receivables. The collection ratio is calculated as the product of the number of days in an accounting period multiplied by the average amount of outstanding accounts receivables divided by the total amount of net credit sales during the accounting period. The collection ratio calculation provides the average number of days it takes a company to receive payment. The lower a company's collection ratio, the more efficient its cash flow.
The final element of working capital management is inventory management. To operate with maximum efficiency and maintain a comfortably high level of working capital, a company must carefully balance sufficient inventory on hand to meet customers' needs while avoiding unnecessary inventory that ties up working capital for a long period before it is converted into cash. Companies typically measure how efficiently that balance is maintained by monitoring the inventory turnover ratio. The inventory turnover ratio, calculated as revenues divided by inventory cost, reveals how rapidly a company's inventory is being sold and replenished. A relatively low ratio compared to industry peers indicates inventory levels are excessively high, while a relatively high ratio indicates the efficiency of inventory ordering can be improved.

Days Working Capital
Days working capital is an accounting and finance term used to ... 
Current Ratio
The current ratio is a liquidity ratio that measures a company's ... 
Short Term
1. In general, holding an asset for short period of time. 2. ... 
Accounting Ratio
Accounting ratios, also known as financial ratios, are used to ... 
Inventory Turnover
Inventory turnover is a ratio showing how many times a company ... 
Capitalization Ratios
Capitalization ratios are indicators that measure the proportion ...

Investing
Liquidity Measurement Ratios
Learn about the current ratio, quick ratio, cash ratio and cash conversion cycle. 
Investing
Key Financial Ratios for Retail Companies
Using the following liquidity, profitability and debt ratios, an investor can gather deeper knowledge of a retail company's shortterm and longterm outlook. 
Investing
Measuring Company Efficiency To Maximize Profits
Efficiency ratios can provide indications of profitability, shows how efficiently a company is being managed, utilizes its assets and handles liabilities. 
Investing
Advantages of Maintaining Low Working Capital
Understand the benefits and advantages of maintaining low working capital as related to liquidity needs, capital allocation and operational efficiency. 
Investing
Dynamic Current Ratio: What It Is And How To Use It
Learn why this ratio may be a good alternative to the current, cash and quick ratios. 
Investing
How Working Capital Works
A firm's handling of working capital reflects its efficiency, financial strength and cash flow. 
Small Business
Retail vs. Tech: How These Companies Use Working Capital
Learn about the difference between retail and tech businesses' use of working capital and why working capital varies so widely in the technology sector. 
Investing
6 Basic Financial Ratios And What They Reveal
These formulas can help you pick better stocks for your portfolio once you learn how to use them. 
Investing
How to Analyze a Company's Inventory
Discover how to analyze a company's inventory by understanding different types of inventory and doing a quantitative and qualitative assessment of inventory.

How can an investor determine the efficiency of a company's working capital management?
Learn how working capital is vital to a company’s survival. Also learn key metrics investors use to assess how efficiently ... Read Answer >> 
What are the components associated with working capital management?
Learn what the three main components of working capital management are and how each is significant to efficient financial ... Read Answer >> 
How do you calculate working capital?
The formula for calculating working capital is straightforward, but lends great insight into the shortterm financial health ... Read Answer >> 
What do efficiency ratios measure?
Learn about efficiency ratios, what they measure, how to calculate commonly used efficiency ratios and how to interpret these ... Read Answer >> 
Does working capital measure liquidity?
Learn about working capital and liquidity, and how working capital measures the liquidity, efficiency and overall health ... Read Answer >> 
How do the current ratio and quick ratio differ?
The current ratio and the quick ratio are both liquidity ratios that measure how a company's ability to pay off its shortliabilities ... Read Answer >>