What is Working Capital Management? - Definition & Examples

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Working Capital Turnover Ratio: Formula & Interpretation

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
Your next lesson will play in 10 seconds
  • 0:02 What Is Working…
  • 1:58 Working Capital…
  • 3:19 Using the Data
  • 3:47 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Speed Speed

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Mike Miller
Have you ever wondered how a company manages its money and pays its bills? Working capital management is how companies are able to manage finances and continue operations.

What Is Working Capital Management?

Working capital management is the way a company manages the relationship between assets and liabilities in the short term. Simply put, working capital management is how a company manages its money for day to day operations as well as any immediate debt obligations. When managing working capital, the company has to manage accounts receivable, accounts payable, inventory, and cash. The goal of working capital management is to have adequate cash flow for continued operations and have the most productive usage of resources.

There are a few calculations we have to discuss in regards to working capital management. To calculate working capital, a company would take current assets and subtract current liabilities.

Working capital efficiency is determined by calculating the working capital ratio. This ratio is a key indicator in the company's financial health. The working capital efficiency is calculated by taking current assets divided by current liabilities. If the result of the calculation is less than 1.0, then it is taken as a sign that the company's having financial issues. If the result of the calculation is greater than 1.0 but less than 2.0, then the company is in good financial health. If the calculation yields a result greater than 2.0, then company may not be making an effective use of its assets.

The next calculation we need to understand is receivables turnover. This is a calculation of how many times an account is created and collected during the reporting period. Receivables turnover is calculated by dividing the total revenue by average receivables. That was a long way to say how many times orders are being created and invoiced during the reporting period.

The last calculation we need to understand for working capital management is the inventory turnover ratio. The inventory turnover ratio is calculated by costs of goods sold divided by the average inventory costs. If the results are less than 1.0 then the company is not moving enough inventory.

Working Capital Management in Action

John is the CEO of Wookie Inc. and he is trying to determine what his working capital is to see if he can invest in a new technology. Wookie Incorporated has current assets totaling 8.9M, and their current liabilities are 7.6M. John takes 8.9 minus 7.6 and the result is 1.3M. John feels good about having 1.3M of available capital. He takes his calculations a little further to determine what the working capital effect is for Wookie Inc. He takes 8.9 divided by 7.6 to get a ratio of 1.17. With the calculations, John determines that the company is in good financial health, and he can invest in new technology.

To unlock this lesson you must be a Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use

Become a member and start learning now.
Become a Member  Back
What teachers are saying about
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account