Chapter

Working Capital

Lorenzo A. Preve and Virginia Sarria-Allende

in Working Capital Management

Published in print March 2010 | ISBN: 9780199737413
Published online May 2010 | e-ISBN: 9780199775637 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199737413.003.0002

Series: FMA SURVEY

Working Capital

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This chapter develops a useful definition and interpretation of working capital. We argue about the limitations of the standard definition, and suggest that by introducing a second, complementary concept, financial needs for operation (FNOs), a more comprehensive understanding of working capital can be achieved. A firm's FNOs are the level of operating investment needed for the company to operate its business. This investment can be financed using working capital and/or short‐term financial debt. Selecting the mix between these two is among the firm's most important strategic business decisions; therefore, the consideration of working capital in isolation will usually lead the manager astray.

Keywords: corporate finance; working capital management; financial needs for operation; financial analysis

Chapter.  4465 words.  Illustrated.

Subjects: Financial Markets

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