Optimizing working capital management

Abstract

Although the operating cycle, the cash conversion cycle, and the net trade cycle are more comprehensive measures of working capital management compared with traditional measures such as the current ratio and the quick ratio, these measures do not consider the optimal points of payables, inventory, and receivables. In this study, we suggest more accurate measures of the efficacy of working capital management where optimal levels of inventory, receivables, and payables are identified, and total holding and opportunity costs are minimized. In this paper, we suggest an optimal operating cycle, an optimal cash conversion cycle, and an optimal net trade cycle as more accurate and comprehensive measures of working capital management.