Working capital management involves the management of firm ensuring that they can meet their short-term debt obligations. If they can’t, then it may risk the future of the firm as they may default.
Working capital is the difference between the money that a company earns in the short term and how much they owe in the short term. Companies hope to minimize this figure in order to be efficient.
The current ratio is a key ratio that measures how well a company can meet its short-term obligations. It is calculated by dividing current assets by the current liabilities. A current ratio above 1 is desirable.
The quick ratio is another method. The only difference is that it removes inventory from the current assets figure as it may not be sold quickly. the formula is (current assets – inventory) ÷ current liabilities.
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