Optimizing Working Capital Management
Abu Dhabi University; University of Liverpool
Maryam Al Hajjar
Abu Dhabi University
December 28, 2009
Although the operating cycle, the cash conversion cycle, and the net trade cycle are more comprehensive measures of working capital management comparing with traditional measures of liquidity such as the current ratio and the quick ratio. However, these measures do not consider the optimal points of payables, inventory, and receivables. In this study we suggest more accurate measures of the efficiency of working capital management where optimal levels of inventory, receivables, and payables are identified, and total holding and opportunities cost are minimized and recalculating the operating cycle, the cash conversion cycle, and the net trade cycle according to these optimal points.
Keywords: Working Capital Management, Optimal Cash Conversion Cycle, Optimal Net Trade Cycle, Optimal Operating Cycle, Receivable Collection Period, Inventory Conversion Period, Payable Deferral Period
JEL Classification: G3, G32, L25, O25
Date posted: December 29, 2009 ; Last revised: August 12, 2012
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