Working capital management

What is working capital management and how does it work?

Working capital management is the process of managing a business's short-term assets and liabilities to ensure it has enough cash to meet its financial obligations. It involves managing your current assets and current liabilities.

Key takeaways

  • Working capital management is essential for the success and sustainability of any business.
  • It enables businesses to manage their short-term cash flow requirements and meet their financial obligations.
  • Effective working capital management involves managing current assets and current liabilities, forecasting cash flow requirements, and implementing strategies to improve working capital.

What are current assets?

Current assets are short-term assets that can be easily converted into cash within a year, including:

Cash and cash equivalents

These are liquid assets that can be easily converted into cash, such as bank accounts, money market funds, and short-term investments.


These are raw materials, work in progress, or finished goods that the business holds for sale.

Accounts receivable

These are amounts owed to the business by customers or clients for goods or services that have been delivered but not yet paid for.

Prepaid expenses

These are expenses that have been paid in advance, such as insurance premiums or rent.

What are current liabilities?

Current assets are short-term assets that can be easily converted into cash within a year, including:

Accounts payable

These are bills owed to suppliers or vendors for goods or services that have been received but not yet paid for.

Accrued expenses

These are expenses that have been incurred but not yet paid, such as salaries or rent.

Taxes owed

These are taxes that must be paid within a year, such as income taxes or sales taxes.

What are the 3 working capital management ratios?

The three main working capital management ratios are the current ratio, quick ratio, and cash conversion cycle. These ratios provide valuable insights into a business's short-term liquidity and ability to meet its financial obligations.

An example of good working capital management

As a business owner, it's important to have a solid understanding of working capital management. One area that can cause cash flow problems is late payments from customers. To address this issue, you may want to implement an effective accounts receivable collection strategy.

To start, review your accounts to identify delinquent customers and determine the extent of the issue. Then, implement effective credit control procedures such as stricter payment terms and more frequent follow-ups with customers who have outstanding invoices. Offering early payment discounts can also encourage customers to pay their invoices sooner.

If you're still struggling with cash flow, consider invoice financing, which allows you to use unpaid invoices as collateral for funding. This provides quick access to a percentage of the invoice value and can help you maintain cash flow while waiting for customers to pay.

By effectively managing your accounts receivable, you can improve your cash flow position and overall working capital management. This can help you achieve greater business success and sustainability. Don't let late payments from customers create cash flow problems for your business - take action with an effective accounts receivable collection strategy.

Have you ever thought about invoice finance to help improve your cash flow?

Invoice finance allows you to release cash quickly from your unpaid invoices.

As your lender, we can release up to 90% of your invoices within 24 hours. On payment of the invoice from your customers, we will then release the final amount minus any fees and charges. There are different types of invoice financing options available to businesses depending on the situation and the level of control they require in collecting unpaid invoices.

We are an invoice financing company who offer a solution whereby payments are collected on your behalf managed by our team of expert credit controllers so you can focus on running your business. Our Confidential Invoice Discounting solution is offered to businesses who want to maintain their own credit control processes, therefore this remains strictly confidential so your customers are unaware of our involvement.

Get in touch

Contact our friendly UK advisors on our freephone

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The benefits of invoice finance companies such as Novuna Business cash flow

  • Boost your cash flow without having to wait up to 120 days for your customers to pay you

  • Release up to 90% of the invoice straight away, and the final 10% when the invoice is settled

  • Access funds within 24 hours from initial appointment with our revolutionary digital onboarding process

  • Benefit from our in-house credit control processes, allowing you to focus on running your business, instead of chasing clients for payment

  • Six month trial period followed by a rolling contract

Want to understand more Cash Flow Finance terms?

Our Cash Flow Resource Hub has been set up to help SME's with cash flow finance advice, tips and resources to help with their cash flow position.

We explore ways you can begin improving your cash flow situation and start getting your business on track to positive cash flow.

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