Working Capital: Meaning, Ratios & Importance

This study offers a relevant and well-executed analysis of how managerial ability affects working capital management efficiency (WCME) in large Indian firms. The authors use Data Envelopment Analysis (DEA) to measure efficiency (managerial ability – MA) and Generalized Estimating Equations (GEE) for regression modeling. Spanning across ten years, from 2014 to 2023 the study considers 150 listed corporations from the National Stock Exchange (NSE). The dataset is further refined based on the market capitalization for 2023 and data availability. The selection criteria also considers removal of corporations from specific industries, such as banks, financial institutions, utilities, and ICT, because of their distinct WCM characteristics (Roy et al., 2025).

MeSH terms

While you can be guided by historical results, you’ll also need to factor in new contracts you expect to sign or the possible loss of important customers. It can be particularly challenging to make accurate projections if your company is growing rapidly.

Working Capital Investment or Financing Policy

• The observation aligns with the UET, confirming that managerial attributes directly influence organizational outcomes (Banerjee & Deb, 2023, 2024;Hambrick & Mason, 1984).
• Samsung, a leading manufacturer of consumer electronics, is evaluating two working capital strategies to understand their impact on valuation.
• For example, if a company has $100,000 in current assets and $30,000 in current liabilities, it has $70,000 of working capital.
• Mike is the Chairman and Co-Founder of McCracken, a professional services firm dedicated to supporting companies with their finance needs in talent, leadership development, and technology.

This is mainly because some current assets of the business will always stay as reserves and, therefore, not be efficiently utilized. Similarly, the risks are low because long-term finance is used instead of short-term. Current assets are those that can be converted into cash within 12 months, while current liabilities are obligations that must be paid within the same timeframe.

They also excel in managing an ideal operating cycle, catering to the needs of the customer as well as the organisation (Banerjee & Deb, 2023;Roy et al., 2025). Through an efficient management of inventory levels, the transportation costs gets reduced and stock outs are avoided. Skilled managers negotiate beneficial terms with suppliers, ensures efficient cash outflows and strong supply chain relationships helping in efficient receivable management (Roy et al., 2025).

The goal of working capital management is to minimize financial risks while maximizing operational efficiency. A well-managed working capital cycle ensures that a business has enough funds to cover short-term expenses, pay suppliers on time, and invest in growth opportunities without relying too heavily on external financing. Have you ever wondered why some businesses struggle with cash flow despite generating strong sales? Businesses need sufficient working capital to cover daily expenses, manage short-term debts, and sustain operations. Without it, even a profitable company can face liquidity issues and financial strain.

Automation Software for Large and Midsized Businesses

Thanks to this extensive synergy, they fully understand the complexity of many industries, allowing an active participation in the further development and growth of companies within the group’s portfolio. Last but not least, the manuscript would benefit from clearer visual representations of the results, such as charts showing how the impact of managerial ability changes across different firm types. •    Managerial Relevance – The results offer practical insights for corporate leaders, suggesting that firms should enhance managerial skill development to improve WCME and achieve long-term sustainability. •    Empirical Contribution to Indian Corporate Finance – The study fills a gap in the literature on working capital efficiency and managerial effectiveness in emerging markets by focusing on Indian listed firms. •    Robust Methodological Approach – The integration of DEA and GEE models provides a rigorous analytical framework, ensuring precise measurement of efficiency and managerial ability.

Variance Analysis

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• The goal of working capital investment policy is to arrange for working capital to be obtained at the lowest possible cost for the business.
• Currently, he is actively managing the construction of a 200 MW portfolio of wind farms for a top-notch international investor, Blackrock.
• High borrowing costs and frequent repayment obligations can strain cash flow, increasing financial risk and limiting long-term growth opportunities.
• These are meant for general information only or to meet statutory requirements or disclosures.
• Current liabilities encompass all debts a company owes or will owe within the next 12 months.

It would guarantee optimization of short-term financial decisions and balancing long-term growth strategies. The positive relationship of MA and WCME indicates the importance of investment in talent acquisition, training, and development programs. Moreover, the study suggests that firms, particularly those with high market valuations, may need to balance the pursuit of strategic growth with the need for efficient working capital management. Managers in such firms must be aware of the potential trade-offs between long term investments and WCM efficiency, ensuring that capital allocation does not come at the expense of operational liquidity. The negative association between firm size and WCME indicates that larger firms face increased complexities in managing working capital effectively, possibly due to more complex operational structures. They are known as Working Capital Investment Policy (WCIP) and Working Capital Financing Policy (WCFP) (Addin Al-Mawsheki, 2022;Nazir & Afza, 2009).

Cash Flow

Current liabilities are obligations of a business that must be paid within 12 months. These typically include accounts payable or trade payable, accrued expenses or accrued liabilities, and short-term debts, etc. Working capital management is the process of optimizing a company’s short-term assets and liabilities to ensure smooth operations.

For example, if a company has $100,000 in current assets and $30,000 in current liabilities, it has $70,000 of working capital. This means the company has $70,000 at its disposal in the short term if it needs to raise money for any reason. By efficiently managing receivables, payables, and inventory, businesses can reinvest surplus funds into expansion, innovation, and strategic investments. Additionally, timely payments to suppliers can help businesses secure early payment discounts, boosting overall profitability. Effective working capital management is a critical aspect of financial planning that ensures a company maintains adequate liquidity to sustain daily operations while maximizing efficiency and profitability.

However, businesses often face several challenges that can disrupt cash flow and operational efficiency. Additionally, HighRadius’ Cash Management Module provides real-time visibility into cash positions across multiple bank accounts, geographies, and currencies, allowing for better cash flow planning and management. It leverages advanced analytics to support strategic financial decisions, such as investment opportunities and funding requirements, helping you with effective working capital management. Efficient working capital management not only helps maintain smooth operations, but also can help to improve earnings and profitability and maintain a solid balance between growth and liquidity. Working capital management (WCM) oversees and improves a company’s money, inventory, and short-term debt. The primary goal is to ensure that a company can fund its operations without facing cash flow interruptions or liquidity crunches (being unable to pay bills), which, in turn, supports sustainable growth.

Previously studies have used various proxies of MA based on manager’s education, managerial tenure and achievements (Bertrand & Schoar, 2003;Fee & Hadlock, 2003). However, there were limitations in these proxies that paved way to the development of more robust method.Demerjian et al. (2012) suggested a reasonable measurement process of MA in their seminal work. It consisted of a two staged approach where firstly corporate efficiency needs to be calculated using Data Envelopment Analysis (DEA) and a first stage regression.

Similarly, if the business negotiates low credit periods and high limits with suppliers, it may not be able to pay some of them on time. Likewise, the business cycles of a particular business may also be worth considering for working capital management. These factors may affect different industries or whole economies that businesses operate in. The reason why businesses are affected by the business cycle is that it determines the demand for specific goods. Similarly, as discussed above, if a business has a seasonal nature, it may have different working capital requirements as compared to normal businesses. For example, during a busy season, seasonal businesses will require more stock and accumulate more accounts receivable balances.