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Know Details of a Bottom-Up Example – Correlation Between Short Term Accruals and Working Capital!

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Working capital is the measure of a company’s efficiency. It is determined by the correlation between short term accruals and short term financial health of the firm. Finance depicts working capital as the difference between current assets and liabilities.

Working capital = current assets – current liabilities

Specific suggestions:

Our report on a bottom-up example – correlation between short term accruals and working capital homework help suggests the following

  • Working capital ratio i.e. current assets/current liabilities denote if the firm has sufficient short term assets to cover its short term debts.
  • The ratio ideally should remain between 1.2 and 2.0.
  • If the ratio indicates a value below 1, it implies negative working capital.
  • Similarly,ration above 2 implies the company does not invest its excess assets.
  • The ideal ratio is often termed as ‘net working ‘

Significance of working capital

Going by our analytical study a bottom-up example – correlation between short term accruals and working capital homework help, we have come across some important features

  • In order to maintain a healthy balance sheet, the company must have current assets i.e. short term assets exceeding its current liabilities
  • As a result of decreasing sale volume, amount receivable/short term accrual gets reduced drastically affecting in the increase of liabilities
  • Fall in short term accruals adversely affects the working capital
  • Investors take a look on working capital to understand the underlying operational efficiency of the firm
  • A slow collection of short term accruals indicates money blocked with debtors and in inventory
  • The company is ineffective in its collections and meeting obligations to its creditors
  • Ineffective operational policy results in increase of working capital wherein liabilities will offset the assets

A bottom-up example – correlation between short term accruals and working capital assignment help denotes a negative working capital is an indicator of falling financial health of business. On the contrary, a high working capital ratio does not imply a good rate of growth either. They indicate too much inventory holding a detrimental factor when it comes to the growth of business.

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