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Home > Cash Flow Management Checklists > Managing Working Capital

Cash Flow Management Checklists

Managing Working Capital

Checklist Description

This checklist explains what working capital is and how it is used.

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Working capital, also known as net working capital, is a measurement of a business’s current assets, after subtracting its short-term liabilities, typically short term. Sometimes referred to as operating capital, it is a valuation of the assets that a business or organization has available to manage and build the business. Generally speaking, companies with higher amounts of working capital are better positioned for success because they have the liquid assets that are essential to expand their business operations when required.

Working capital refers to the cash that a business requires for its day-to-day operations—for example, to finance the conversion of raw materials into finished goods that the company can then sell for payment.

Among the most important items of working capital are levels of inventory, accounts receivable, and accounts payable. Working capital can be expressed as a positive or a negative number. When a company has more debts than current assets, it has negative working capital. When current assets outweigh debts, a company has positive working capital.

The requirement for working capital depends on the type of company. Some companies are intrinsically better off than others. Examples include retailers (which have a fast turnover of cash) and insurance companies (which receive premiums before having to settle claims).

Manufacturing companies, on the other hand, can incur considerable upfront costs for materials and labor before they receive payment. For much of the time, these companies spend more cash than they generate.

A company will try to manage cash by:

  • identifying the cash balance that allows it to meet day-to-day expenses but minimizes the cost of holding cash;

  • finding the level of inventory that allows for continuous production but lessens the investment in raw materials and reduces reordering costs;

  • identifying the appropriate source of financing, given the cash-conversion cycle.

It may be necessary to use a bank loan or overdraft. However, inventory is preferably financed by credit arranged with the supplier.

If a company is not operating efficiently, this will show up as an increase in the working capital. This can be judged by comparing the amounts of working capital from one period to another. Slow collection and inventory turnover may signal an underlying problem in the company’s operations.

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  • Proper management of working capital gives a firm the assurance that it is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.

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Action Checklist

  • Check the amount of working capital. If a company is not operating in the most efficient manner (for example slow collection), it will show up as an increase in working capital. This can be understood by comparing the working capital from one period to another. Slow collection may signal a fundamental problem in the company’s management.

  • Is your ‘performance indicator’ for credit control better than those of other businesses in the same sector?

  • Invoices should always be accurate in every detail and to the penny when quoting amounts. Inaccuracy is an excuse to query and delay payment. Also aim to send out your invoice the day after delivery of the goods.

  • Chase debtors—Money that customers still owe cannot be used meet other obligations.

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Dos and Don’ts


  • Check that a company has sufficient working capital, as this is an indicator of the success of the business. Lack of working capital may not only mean that a company is unable to grow, but also that it has too little cash to meet its short-term obligations.


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Further reading


  • Berman, Karen, and Joe Knight, with John Case. Financial Intelligence: A Manager’s Guide to Knowing What the Numbers Really Mean. Boston, MA: Harvard Business School Press, 2006.
  • Downes, John, and Jordan Goodman. Finance and Investment Handbook. 8th ed. Hauppauge, NY: Barron’s Educational Series, 2010.


  • García-Teruel, Pedro Juan, and Pedro Martínez-Solano. “Effects of working capital management on SME profitability.” International Journal of Managerial Finance 3:2 (March 2007): 164–177. Online at:
  • Tooling and Production. “Conserve working capital.” June 2008. Online at:


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