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When we say we need to invest in more working capital, what does that exactly mean? I can understand the investment in cash and inventory but how does one exactly “finance” recievables?
The higher the level of working capital, the more finance is required.
If a company has receivables then they have less cash than if customers had paid immediately – this means that either they have a lower cash balance than they otherwise would have (and so lose interest they could have been receiving), or they need an overdraft (and therefore have to pay interest), or they need more long-term borrowings (and therefore have to pay more dividends or pay more interest on loans).
Have you watched my free lectures on the management of working capital?
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