Financial Management: Principles and Applications, 13/e

18.1 Working-Capital Management and the Risk-Return Tradeoff

Working-capital management encompasses the day-to-day activities of managing the firm’s current assets and current liabilities. Because cash, accounts receivable, inventory, and accounts payable can change on a daily and even hourly basis, financial managers may spend more time on working-capital management than on any other part of their job. Working-capital management decisions include “How much inventory should we carry?” “To whom should credit be extended?” “Should the firm purchase items for its inventories on credit or pay cash?” and “If credit is used, when should payment be made?”

Measuring Firm Liquidity

The firm’s working-capital choices are critical determinants of its ability ...