Financial managers understand the significance of net working capital (current assets - current liabilities) and various liquidity ratios as they attempt to ensure that bills can be paid. Working capital is not only necessary to run a business; it is a resource that will expand and contract with business cycles and must be carefully managed and monitored.

The cash conversion cycle and the cash budget provide additional working capital management tools Many business exchanges (sales) could not take place without trade credit and the credit terms that are offered.

working capital — the resources that are needed to meet the daily, weekly, and monthly operating cash flow needs. trade credit — credit granted to a business, also called accounts payable; allows a business to buy goods and services on account and pay the cash at some point in the future. credit terms — the terms that are part of a sales credit agreement that indicate when payment is due, possible discounts, and any fees that will be charged for a late payment. current assets — assets that are cash or cash equivalents or are expected to be converted to cash in a short period of time and will be consumed, used, or expire through business operations….