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Working Capital Management have really an impact on business performance. Suppose when there is high demand for the products, company has to keep the inventory levels up and vice versa, which in turn affect the working capital as the current assets level increases or decreases (which will affect both receivables,payables and inventory and sales and profit). But particularly the management has to be very careful in utilisation of working capital to make it at optimum level. ie the mangement has to make carefull analysis to have trade off between liquidity and profitability. Keeping optimum level of working capital management has to allow some level of flexibility to respond with the changes in the operating environment.
The ideal way for financial analysis or WC control, is to keep the WC as % for sales and analysis the return on working capital employed. The changes in working cpaital should be analysed with the changes in business performance ie with sales, inventory and also with working capital cycle. But some times WC changes may be have an impact on the business performance due changes in the operating environment. Suppose in order to attaract more sales company has to provide longer credit period, or company has to store more raw materials in anticipation of price increase, or shortage of material or change in the reorder period etc. which will increase level of working capital and affect the return as well.
Normally a well run business should be able to turn over the available working capital four times. Of course this number goes up and down depending on market conditions, industry/sector, business practices, etc. A working capital manager who knows his job will therefore, determine his requirements by estimating how many times he can turn the available funds over.
