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
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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