Superior Living Working Capital Is the Current Essay

Open, View, and/or
Download this Document

Total Length: 976 words ( 3 double-spaced pages)

Total Sources: 2

Page 1 of 3

Superior Living

Working capital is the current assets less the current liabilities (Kennon, 2012). The working capital is an important metric because it can have a significant effect on the company's short- and long-term decision making. The working capital is affected by the cash position, the inventories and the receivables, along with the short-term liabilities. The current ratio is simply the working capital in ratio format, the current assets divided by the current liabilities (Loth, 2012). If a company has insufficient working capital, this can represent a constraint on operations. The company may need to plow all capital it earns into servicing the liabilities, leaving little for capital projects. Additionally, working capital and current ratio are measures that creditors use to evaluate how much credit to give a company. Often, these measures are also used in the company's restrictive covenants in loans as well.

Aside from the current ratio, there are two other ratios that are used, the quick ratio and the cash ratio. These exist to help distinguish between the different sources of working capital. For a company that has upcoming cash needs, it is important to know how much of our working capital is cash and how much is tied up in inventory and receivables. The latter should be relatively easy to convert to cash on short notice, but inventory may not be.

Thus, it is especially important to manage inventory levels as a means of tightening the cash conversion cycle. The cash conversion cycle is an important concept in working capital management, because it reflects how quickly things like inventory and sales are converted into cash that the company can use. By reducing levels of inventory and receivables, the company can free up more cash for other needs.

Stuck Writing Your "Superior Living Working Capital Is the Current" Essay?

View All Our Example Superior Living Working Capital Is the Current Essay

Have A Custom Example Essay Written

Additionally, stretching payables is another way to free up extra cash. What this means is that there are opportunities with respect to working capital management for the company to ensure that it has cash when it needs it, but only if the company's financial managers are aware of the needs and plan ahead.

There are basically three different ways to handle the short-term debt that is coming due. The first is to pay it off. This will reduce the company's cash position, and it will alter the capital structure of the firm by reducing the total debt level. The second is to roll it over, by acquiring new financing in the same amount. The current debt thus becomes long-term debt. The third way to handle it is to stretch the payables, so that the total level of current liabilities increases but the company frees up more cash to make the payments. This still results in the company paying down the debt but has less of an impact on the cash position. Which option is better depends on the company's cash position. It is recommended, however, that the company know ahead of time how it intends to manage….....

Show More ⇣

     Open the full completed essay and source list


OR

     Order a one-of-a-kind custom essay on this topic


sample essay writing service

Cite This Resource:

Latest APA Format (6th edition)

Copy Reference
"Superior Living Working Capital Is The Current" (2012, February 28) Retrieved June 4, 2026, from
https://www.aceyourpaper.com/essays/superior-living-working-capital-current-78297

Latest MLA Format (8th edition)

Copy Reference
"Superior Living Working Capital Is The Current" 28 February 2012. Web.4 June. 2026. <
https://www.aceyourpaper.com/essays/superior-living-working-capital-current-78297>

Latest Chicago Format (16th edition)

Copy Reference
"Superior Living Working Capital Is The Current", 28 February 2012, Accessed.4 June. 2026,
https://www.aceyourpaper.com/essays/superior-living-working-capital-current-78297
   

Open, View, and/or
Download this Document
order custom essay example