ABSTRACT
Cash is king. David Evans
One of the most important principles in financial management is the tradeoff between risk and return and it applies to managing cash and working capital. Current assets, also known as gross working capital, include inventory, accounts receivable financing, prepaid expenses, and of course, cash. Current liabilities are debts that are due within one year and usually include accounts payable, accrued payroll, accrued taxes, and portions of long-term amortized debt. If a business has insufficient cash or inventory on hand, it may lose sales or incur penalties for bounced checks. However, if the business carries too much cash or inventory, it is not putting costly resources to good use, and inventory may become obsolete and lose value. Managing cash flows, therefore, includes managing current assets, such as accounts receivable and inventory, and current liabilities, such as accounts payable. The difference between current assets and current liabilities is called net working capital.
