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Working Capital Management

Definition - What does Working Capital Management mean?

Working capital management (WCM) is defined as the management of short-term liabilities and short-term assets. The process is used continuously to operate and generate cash flow to meet the need for short-term obligations and daily operational expenses.

Divestopedia explains Working Capital Management

The primary goal of working capital management is to sufficiently maintain the operations of a company. WCM focuses on areas such as inventory and managing accounts receivable/payable. Another method of determining the performance of WCM is the use of ratios, such as working capital ratio, inventory ratio, and collection ratio. These ratios are used in WCM to determine the weaknesses and strengths of an organization.

Working capital management is an extremely important area of consideration when selling a mid-market business. Effective working capital management means that business owners will maintain working capital levels as low as possible while still having an adequate amount to run the business. At the point of sale, a buyer will look at historical levels to determine an appropriate amount of non-cash working capital to leave in the business post acquisition. The vendor will usually be able to remove excess cash from the business prior to sale.

If the average non-cash working capital has been maintained at a low level historically, then buyers will usually ask for a comparable level. The same is true if inefficiently high levels of working capital have been maintained. On sale, the level of working capital will have a direct impact on the total cash proceeds that vendors will receive.

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