ACCA F9考試：Working Capital

1 Importance

Working capital— the capital represented by net current assets which is available for day-to-day operating activities. It normally includes inventories, trade receivables, cash and cash equivalents, less trade payables.

The definition of working capital is fairly simple; it is the difference between an organisation's current assets and its current liabilities. Of more importance is its function, which is primarily to support the day-to-day financial operations of an organisation, including the purchase of inventory, the payment of salaries, wages and other business expenses, and the financing of credit sales.

Many businesses which appear profitable are forced to cease trading due to an inability to meet short-term obligations when they fall due. To remain in business, it is essential that an organisation successfully manage its working capital. Too often, however, this area is ignored.

Working capital comprises a number of different items and its management is difficult because these are often linked. Hence, altering one item may adversely affect other areas of the business.

Management must ensure that a business has sufficient working capital. If the organisation has too little working capital, the result will be cash flow problems highlighted by exceeding the agreed overdraft limit, failing to pay suppliers on time and being unable to claim discounts for prompt payment. In the long run, a business with insufficient working capital will be unable to meet its current obligations and will be forced to cease trading even if it remains profitable on paper.

On the other hand, if an organisation ties up too much of its resources in working capital, it will earn a lower-than-expected rate of return on capital employed. Again, this is not a desirable

situation.

Working capital management is crucial to the effective management of a business because:

current assets make up over half the assets of some companies; and

failure to control working capital, and therefore liquidity, is a major cause of business failure.