Back to course 'BUS202: Principles of Finance'

Topic outline

  • Unit 3: Working Capital Management

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    Working capital management explains how companies manage their day-to-day financial decisions. Effective management of current assets and current liabilities is crucial to make sure companies have enough cash flow to meet their regular obligations and maximize their financial return. The four main focus areas in working capital management are cash, accounts receivable, inventory, and accounts payable. Companies try to find the most effective use of assets and liabilities while balancing the trade-off between liquidity and profitability.

    Completing this unit should take you approximately 6 hours.

    • Upon successful completion of this unit, you will be able to:

      • illustrate the objectives of working capital management;
      • explain the principles of cash management;
      • differentiate the sources of short term financing for a firm; and
      • summarize the factors involved in setting inventory management policies.

    • 3.1: Overview of Working Capital

      • page icon
        Financial Analysis: Working Capital Example Page
        Students must
        Mark as done

        This very brief video introduces the concept of working capital and how it is calculated.

      • book icon
        Working Capital Book
        Students must
        Mark as done

        This chapter presents an overview of working capital: how a company manages its current assets and current liabilities. Working capital decisions are the day-to-day decisions all companies must make to keep their operations running. While they may not seem as critical as stock issues and capital budgeting, the reality is that poor short-term management is a leading reason why businesses fail. Understanding these concepts is essential for everyone in an organization.

    • 3.2: Cash Management

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        The Importance of Cash and Cash Management Book
        Students must
        Mark as done

        Management of cash is the primary concern of most entrepreneurs when they start a business. How will they ensure they collect funds in time to pay their bills? Cash management is also a key concern for most households. For example, I may know that I make enough money to pay all my bills, but if the timing of when the cash hits my bank versus when my bills are due isn't in sync, I run the risk of penalties or worse.

    • 3.3: Managing Accounts Receivable

      • book icon
        Accounts Receivable Book
        Students must
        Mark as done
        Accounts receivable are the funds your customers owe you. A business counts on that money to pay bills. What happens when customers don't pay? How do you know if your credit terms aren't too lenient or restrictive? How can you get your customers to pay you faster?

    • 3.4: Inventory Management

      • book icon
        Inventory Management Book
        Students must
        Mark as done

        Manufacturing companies take raw materials and turn them into finished products. Merchandising companies buy product and resell it. Both types of companies must manage their inventory. If you order too much, you risk obsolescence, spoilage, or inability to sell. If you order too little, you may lose sales you could have made and risk upsetting your customers. This section will help you understand how companies manage their inventory to minimize overall costs.

    • 3.5: Sources of Short-Term Financing

      • book icon
        Overview of Short-Term Financing Book
        Students must
        Mark as done

        In this section, you will learn the options companies have when they need to borrow for a short period. Imagine if you are a caterer who just got your first big corporate job. You need to buy ingredients and hire workers before the event. The company will pay you when you invoice them after the event. Where do you get the cash to allow you to accept the job before getting paid? What are your options for financing if your business is seasonal?

    • Unit 3 Practice and Assessment