Entry Working Capital

Grzegorz Zimon

Department of Finance, Banking, and Accountancy, The Faculty of Management, Rzeszow University of Technology, 35-959 Rzeszow, Poland; [email protected]

Definition: The simplest net working capital can be defined as the difference between the value of current assets and short-term liabilities together with other short-term accruals. It is equivalent to the part of the current assets financed with equity, provisions for liabilities, long-term liabilities, and the remaining part of accruals. Therefore, it is the capital that finances only that part of the current assets that are not financed with short-term liabilities. This amount is financed with fixed capital. Summing up, net working capital is the fixed capital that finances the company’s current assets.

Keywords: working capital; strategy; financial liquidity; financial security

1. Introduction There are many definitions of net working capital in the literature. It is often referred to as working capital, net working capital (NWC), or circulating capital. In the literature, the concept of working capital is most often considered in net or gross terms [1–3]. On the other hand, gross working capital are current assets used in the normal operating cycle [3–7]. The term “working capital” is derived from an old Yankee travelling merchant who


loaded goods onto his cart and was on the way to sell them. These commodities were
 referred to as “working capital” as he had to circulate them in order to make a profit. The Citation: Zimon, G. Working Capital. cart and horse were his fixed assets [4]. The merchant owned the cart and the horse, so Encyclopedia 2021, 1, 764–772. https:// they were financed with equity. However, he had to borrow funds to buy the goods that he doi.org/10.3390/encyclopedia1030058 wanted to sell. These were called working-capital loans and had to be paid off after each trip to prove the merchant’s creditworthiness. When the merchant was able to pay off the Academic Editors: Chia-Lin Chang loan, the bank was willing to give him another [3,4]. The example of this definition clearly and Philip Hans Franses shows that working-capital management includes a number of key elements related to company finances, i.e., short-term receivables, inventories, cash, and short-term liabilities. Received: 2 July 2021 Authors usually present current assets and liabilities as two basic elements that Accepted: 3 August 2021 influence the level of net working capital. Apart from current assets and current liabilities, Published: 6 August 2021 profits that generate sales revenue are the third most important element that significantly influences the level of net working capital. Several studies showed that the length of the Publisher’s Note: MDPI stays neutral production process and other technological characteristics are important determinants of with regard to jurisdictional claims in working-capital demand [8,9]. published maps and institutional affil- However, current assets are the most relevant areas that affect the level of working iations. capital. The entire current asset management process generally focuses on two elements, i.e., inventories and receivables from customers. Inventories are the component of current assets that generates high costs. By analyzing small and medium-sized enterprises in this area, one can find many places where unnecessary costs are incurred. Therefore, in order Copyright: © 2021 by the author. to create an optimal working-capital management strategy, it is necessary to introduce Licensee MDPI, Basel, Switzerland. various methods, inventory-management tools derived from logistics, which optimize the This article is an open access article level of inventories and the costs of their management. distributed under the terms and In turn, receivables from customers are a component that directly impacts creating a conditions of the Creative Commons policy of managing liabilities towards suppliers. Establishing a receivables-management Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ strategy very often determines the policy of managing liabilities towards suppliers. 4.0/).

Encyclopedia 2021, 1, 764–772. https://doi.org/10.3390/encyclopedia1030058 https://www.mdpi.com/journal/encyclopedia Encyclopedia 2021, 1, FOR PEER REVIEW 2

Encyclopedia 2021, 1, FOR PEER REVIEW 2

In turn, receivables from customers are a component that directly impacts creating a policy of managing liabilities towards suppliers. Establishing a receivables-management Encyclopedia 2021, 1 strategyIn turn, very receivables often determines from customers the policy are ofa co managingmponent liabilitiesthat directly towards impacts suppliers. creating a 765 policyDecisions of managing made liabilities by managers towards in suppliers.the area of Establishing current assets a receivables-management should aim at determining strategythe appropriate very often levels determines and structure the policy of ofindivi managingdual elements liabilities that towards make suppliers. up the current as- Decisions made by managers in the area of current assets should aim at determining sets [5].Decisions Inventories made and by managersshort-term in receivable the area ofs are current such assets elements should of current aim at determiningassets in the the appropriate levels and structure of individual elements that make up the current as- thecase appropriate that the selection levels andof an structure appropriate of individual management elements strategy that determines make up thethe currentlevel of sets [5]. Inventories and short-term receivables are such elements of current assets in the assetscosts incurred [5]. Inventories by an andenterprise. short-term Is it receivables high or low are suchcost? elements The prerequisite of current assetsfor effective in the casemanagement that the selection in this placeof an isappropriate a continuous management control of strategy the risks determines associated the with level holding of casecosts thatincurred the selection by an enterprise. of an appropriate Is it high management or low cost? strategy The prerequisite determines thefor leveleffective of costs incurredassets [10]. by an enterprise. Is it high or low cost? The prerequisite for effective management managementThe second in this area place that isstrongly a continuous influences control working of the capitalrisks associated is the management with holding of cur- inassets this [10]. place is a continuous control of the risks associated with holding assets [10]. rent liabilities. Managing this area mainly involves managing liabilities towards suppli- TheThe second second area area that that strongly strongly influences influences working working capital capital is is the the management management of of cur- current ers whose share in the structure of short-term liabilities is generally very high. liabilities.rent liabilities. Managing Managing this this area area mainly mainly involves involves managingmanaging liabilities liabilities towards towards suppli- suppliers whoseers whose share share in thein the structure structure of of short-term short-term liabilities liabilities is is generally generally veryvery high.high. 2. Working-Capital Level 2. Working-Capital When calculating Level Level net working capital, one can use the capital and property ap- proaches:WhenWhen the calculating first approach netnet workingworking is referred capital,capital, to one ason e canequity, can use use theas thethe capital capitalstarting and and propertypoint property of approaches:the ap-calcula- theproaches:tions first includes approach the first the approach iscompany’s referred is to referredfixed as equity, capital. to as as equity, the starting as the point starting of the point calculations of the calcula- includes thetions company’s Netincludes working the fixed company’s capital capital. = fixed fixed capitalcapital. − fixed assets NetNetThe working workingsecond waycapital capital is the= =fixed fixedproperty capital capital approach, − fixed− fixed assets as assets it starts from current assets [4,6,9–11]. TheTheNet second secondworking way way capital is is the the =property propertycurrent approach,assets approach, − short-term as asit starts it starts liabilities from from current current assets assets [4,6,9–11]. [4,6,9– 11]. NetNetThe working workingvalue of capital capitalworking = =current currentcapital assets assetscan −also short-term− short-term be calculated liabilities liabilities using the short- or long-term approach.TheThe value value In the of of shortworking working term, capital capital so called can can alsoon also th bee bebalancecalculated calculated sheet, using using net the working theshort- short- orcapital long-term or long-term (NWC) is approach.the surplus In In ofthe the current short short term, assets term, so socalled(CA) called overon th on curree thebalance balancent liabilities sheet, sheet, net (CL). working net The working capitalnet working capital (NWC) (NWC) capitalis isthecalculated the surplus surplus onof ofacurrent short-term current assets assets basis (CA) (CA) is over shown over curre currentinnt Figure liabilities liabilities 1. (CL). (CL). The Thenet networking working capital capital calculated on on a a short-term short-term basis basis is isshown shown in inFigure Figure 1. 1.

FigureFigure 1. 1.1. Net Net working working capital capital on onon a balance-sheetaa balance-sheetbalance-sheet basis. basis.basis. Source: Source:Source: own own research. research.

InInIn long-term, long-term,long-term, i.e., i.e.,i.e., capital capitalcapital terms, terms,terms, it itisit isais surplus aa surplussurplus of offixedof fixedfixed capital capitalcapital (FC) (FC)(FC) over overover fixed fixedfixed assets assetsassets (FS).(FS). The The fixed fixedfixed capital capitalcapital is isis the thethe sum sumsum of of ofequity equityequity capital capitalcapital (EC) (EC)(EC) and andand long-term long-termlong-term liabilities liabilitiesliabilities (LL). (LL).(LL). The TheThe netnet working working capital capitalcapital calculated calculatedcalculated on onon a along-terma long-termlong-term basis basisbasis is shown isis shownshown in Figure inin FigureFigure 2. 2 .2.

Figure 2. Net working capital on a capital basis. Source: own research. FigureFigure 2.2. Net working capital onon aa capitalcapital basis.basis. Source: own research.

Regardless of how the calculations are made, the result must be the same. Net working capital can be: • positive, • negative, or • equal to zero. Encyclopedia 2021, 1, FOR PEER REVIEW 3 Encyclopedia 2021, 1, FOR PEER REVIEW 3

Regardless of how the calculations are made, the result must be the same. Net working capital can be: • Encyclopedia 2021, 1 • positive, 766 • • negative, or • • equal to zero. Positive net working capital (PNWC) is when current assets are higher than current Positive net working capital (PNWC) is when current assets are higher than current liabilities, which is presented in detail in Figure 3. liabilities, which is presented in detail inin FigureFigure3 3..

Figure 3. Positive net working capital. Source: own research. Figure 3. Positive net working capital. Source: own own research.

Positive working capital means the financialfinancial security of an enterprise.enterprise. Current assets are financed financed with short-term liabilities and with fixedfixed capital.capital. The part of the fixedfixed capital that financesfinances thethe currentcurrent assets assets is is called called positive positive net net working working capital. capital. The The positive positive working work- ingcapital capital is the is liquiditythe liquidity reserve reserve that that provides provi securitydes security for future for future situations situations in which in which cash cashshortages shortages arise arise [10,12 [10,12].]. Negative net working capital is when short-term liabilities exceedexceed currentcurrent assets.assets. ItIt is a dangerous situation for enterprises and it means some problems with thethe paymentpayment ofof current liabilities. The situation presented in Figure 44 showsshows thethe levellevel ofof current current liabilities liabilities that,that, apartapart from financingfinancing current current assets, assets, additionally additionally finance finance fixed fixed assets. assets. The fixed The assetsfixed thatassets should that naturally be financed with fixed capital are financed with short-term liabilities. should naturally be financed with fixed capital are financed with short-term liabilities.

Figure 4. Negative net working capital. Source: own research. Figure 4. Negative net working capital. Source: own research. Working capital is equal to zero occurs when current assets equal short-term liabilities, Working capital is equal to zero occurs when current assets equal short-term liabili- as shown in Figure5. ties, as shown in Figure 5. In such a situation, there is no fixed capital to finance the current assets. The fourth possible situation arises when there is no equity capital in an enterprise. The equity is negative. This is an extreme case in entities that have become insolvent and go bankrupt.

The level and size of net working capital can also be determined at the stage of preliminary financial analysis, where the share of fixed assets in the total assets and the share of fixed capital in the total liabilities should be compared. If the share of fixed capitals Encyclopedia 2021, 1 767

in the structure of liabilities is higher than the share of fixed assets in total assets, then there Encyclopedia 2021, 1, FOR PEER REVIEW 4 is positive net working capital in an enterprise. If the opposite is the case, there is negative net working capital.

Figure 5. Zero working capital. Source: own own research.

InThe such level a situation, and size of there working is no capitalfixed capital allow forto finance determining the current the financial assets. The security fourth of possiblean enterprise. situation If the arises working when capital there is no at aequi lowty level, capital then in short-terman enterprise. liabilities The equity are at is a negative.high level This in financing is an extreme current case assets. in entities The level that of have short-term become liabilities insolvent is and reduced go bankrupt. through the timelyThe level payment and size of liabilities, of net working which capital must be ca causedn also bybe determined the rapid rotation at the ofstage short-term of pre- liminaryreceivables financial in days. analysis, In order where to pay the off short-termshare of fixed liabilities, assets in a companythe total assets must haveand the free share cash. ofTherefore, fixed capital trade-credit in the total management liabilities policyshould largely be compared. impacts theIf the level share of net of fixed working capitals capital. in theTrade-credit structure managementof liabilities is appears higher than on the the side share of receivablesof fixed assets from in customers,total assets, andthen on there the isside positive of liabilities net working to suppliers. capital in The an low enterprise level of. If net the working opposite capital is the iscase, also there information is nega- tiveabout net effective working management capital. of working capital. Efficient, but risky, as a low level of net workingThe capitallevel and can size lead of to working a loss of capital financial allow liquidity. for determining the financial security of an enterprise.In the case If when the working the working capital capital is at is a at lo aw high level, level, then it may short-term mean a largeliabilities involvement are at a of equity in financing current operations. If this is due to additional long-term loans, there high level in financing current assets. The level of short-term liabilities is reduced are additional financial costs. If the equity capital increases, it should be positively assessed through the timely payment of liabilities, which must be caused by the rapid rotation of if an enterprise has strong and “healthy” fundamentals for further operation. Every short-term receivables in days. In order to pay off short-term liabilities, a company must enterprise should be led to this direction. A very good method to increase revenue and have free cash. Therefore, trade-credit management policy largely impacts the level of net profits in small enterprises is the use of group purchases. Enterprises acting together working capital. Trade-credit management appears on the side of receivables from cus- achieve the scale effect, which positively influences the reduction in the prices of purchased tomers, and on the side of liabilities to suppliers. The low level of net working capital is goods and materials. also information about effective management of working capital. Efficient, but risky, as a low3. Circulation level of net of working Working capital Capital can lead to a loss of financial liquidity. In the case when the working capital is at a high level, it may mean a large in- Net working capital circulates in an enterprise. Its individual elements are in constant volvement of equity in financing current operations. If this is due to additional long-term motion, which causes the transfer of one asset to another. Details are shown in Figure6. loans, there are additional financial costs. If the equity capital increases, it should be Figure6 shows the circulation of working capital divided into five stages: positively assessed if an enterprise has strong and “healthy” fundamentals for further operation.- Enterprises Every purchaseenterprise raw should materials be led necessary to this direction. for production. A very Cash good is convertedmethod to into in- inventory. However, if payment is made on credit terms, there are current obligations crease revenue and profits in small enterprises is the use of group purchases. Enterprises towards suppliers. acting together achieve the scale effect, which positively influences the reduction in the - The production process starts, which creates an obligation towards employees. prices of purchased goods and materials. - The effects of production appear. A margin is used when selling, which increases current assets with possible inflows. 3. Circulation of Working Capital - Payment deadlines for liabilities expire. If receivables from suppliers have not yet Netbeen working received, capital the company circulates looks in an for enterp newrise. sources Its individual of financing, elements e.g., bankare in loans. con- stant However,motion, which if cash causes is received the transfer earlier, of liabilities one asset are to repaid, another. which Details is the are same shown as the in Figurereduction 6. in current assets and liabilities. - Receipt of receivables from customers. The obtained funds allow for paying off liabilities.

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Figure 6. Circulation of working capital.

FigureThe above-mentioned 6 shows the circulation steps comprise of working the capital working-capital divided into cycle. five Itsstages: definition is as follows: it is the period that elapses from the moment of spending funds for the purchase of - Enterprises purchase raw materials necessary for production. Cash is converted into factors of production until obtaining cash revenues for sold products, which are produced inventory. However, if payment is made on credit terms, there are current obliga- thanks to these factors [6,10]. The length of this cycle consists of the inventory-, the tions towards suppliers. receivables-, and liabilities-conversion cycles. - The production process starts, which creates an obligation towards employees. Working-capital management involves both choosing the amount to invest and man- - The effects of production appear. A margin is used when selling, which increases aging the cash-conversion cycle (the time that it takes to convert working capital into current assets with possible inflows. cash) [10–12].

- PaymentWorking-capital deadlines turnover for liabilities is related expire. to the operatingIf receivables cycle from (OC) andsuppliers the cash-conversion have not yet cyclebeen (CCC). received, the company looks for new sources of financing, e.g., bank loans. However,The operating if cash cycle is isreceived otherwise earlier, known liabilities as the gross are repaid, cycle of which working is the capital, same and as itthe is the sumreduction of the inventory-in current andassets receivables-conversion and liabilities. cycles. It is the period of involvement -of cashReceipt in raw of materialsreceivables until from it is customers. recovered asThe a resultobtained of an funds inflow allow of receivables for paying [4off–6 ].lia- bilities. 3.1. OperatingThe above-mentioned Cycle = Inventory-Conversion steps comprise Cycle the work + Receivables-Conversioning-capital cycle. Its Cycle definition is as follows:The it operating is the period cycle that is often elapses referred from to the as themoment current of asset spending management funds for efficiency the purchase index. of factorsIf we of subtract production the liabilities-conversion until obtaining cash cyclerevenues from for the sold operating products, cycle, which then are the pro- net ducedworking thanks capital to these cycle factors is created, [6,10]. more The commonlylength of this known cycle consists as the cash-conversion of the inventory-, cycle. the receivables-,(Figure7). and liabilities-conversion cycles. Working-capital management involves both choosing the amount to invest and managing3.2. Cash Conversion the cash-conversion Cycle = Operating cycle (the Cycle time− Liability-Conversionthat it takes to convert Cycle working capital into cash)The [10–12]. cash-conversion cycle is the part of the operating cycle that is not financed with short-termWorking-capital liabilities due turnover to their repaymentis related before to thethe endoperating of the cycle. cycle The cash-conversion(OC) and the cash-conversioncycle (CCC) is a basiccycle measure(CCC). of working-capital management that is widely used in the literatureThe operating [12–14]. cycle is otherwise known as the gross cycle of working capital, and it is theAnother sum of definitionthe inventory- of the cash-conversionand receivables-conversion cycle is represented cycles. It as is follows. the period of in- volvement of cash in raw materials until it is recovered as a result of an inflow of re- 3.3. Cash-Conversion Cycle = Inventory-Conversion Cycle + Receivables-Conversion Cycle − ceivablesShort-Term [4–6]. Liabilities-Conversion Cycle 3.1. OperatingThe cash-conversion Cycle = Inventory-Conversion cycle expresses theCycle time + Receivables-Conversion over which current assets Cycle are financed with fixed capital. Otherwise, the net working-capital cycle can be defined as the period The operating cycle is often referred to as the current asset management efficiency corresponding to the time range from the moment of cash outflow related to the payment index.for the delivered materials to the moment of cash inflow for sold products [14,15]. Another interpretationIf we subtract of this the indicator liabilities-conversion informs us about cycle how from many the operating days an enterprise cycle, then needs the net its workingown cash capital to conduct cycle operating is created, activities. more commonly Thus, this is known the period as the in which cash-conversion an entity operates cycle. (Figureby making 7). its operating expenses out of finance from equity or long-term liabilities [3,4],

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which is the period of freezing money in current assets. Enterprises strive to minimize the Encyclopedia 2021, 1, FOR PEER REVIEW 6 time between the inflow of funds related to a purchase and the inflow of funds related to a sale. This period may also be called the “cash gap” [15–20].

FigureFigure 7. OperatingOperating and and cash-conversion cash-conversion cycles.

3.2.4. Working-Capital Cash Conversion Cycle Management = Operating Strategies Cycle − Liability-Conversion Cycle ThePositive cash-conversion working capital cycle is and the its part management of the operating primarily cycle that keep is thenot companyfinanced with in a short-termgood and healthyliabilities financial due to condition—“financial their repayment before health” the [19 ,20end]. Theof the literature cycle. oftenThe cash-conversionreports that working cycle capital(CCC) is directly a basic impacts measure the of company’s working-capital financial management liquidity [20that–23 is], widelyprofitability used [in24 the–33 literature], and solvency, [12–14]. which allows for optimizing costs [21,33–38]. Therefore, its roleAnother and influencedefinition on of the cash-convers financial situationion cycle of is an represented enterprise areas follows. enormous. There are also authors who claim that working-capital decisions have a positive effect on the 3.3.efficiency Cash-Conversion and effectiveness Cycle = ofInventory-Conv enterprise-assetersion management Cycle + Receivables-Conversion [39–44]. Because working Cycle − capi- Short-Termtal significantly Liabilities-Conversion impacts financial Cycle security, profits, operational efficiency, and the process of optimizingThe cash-conversion the costs of cycle the enterprise,expresses the it istime necessary over which to create current an assets optimal are policy financed for withenterprise fixed capital. management. Otherwise, the net working-capital cycle can be defined as the period correspondingThe literature to the presents time range three from main the classical moment strategies of cash for outflow managing related net workingto the payment capital: forconservative, the delivered moderate, materials and to aggressive. the moment of cash inflow for sold products [14,15]. An- The conservative strategy is to keep current assets high and short-term liabilities other interpretation of this indicator informs us about how many days an enterprise relatively low. Enterprises implementing this type of strategies maintain a high level needs its own cash to conduct operating activities. Thus, this is the period in which an of inventories and a relatively lower level of short-term receivables. Cash is also kept entity operates by making its operating expenses out of finance from equity or long-term high. This type of strategy requires low short-term liabilities. The conservative strategy is liabilities [3,4], which is the period of freezing money in current assets. Enterprises strive associated with a high level of liquidity, as there is a significant advantage of current assets to minimize the time between the inflow of funds related to a purchase and the inflow of over current liabilities. It is a safe strategy for an enterprise [29]. funds related to a sale. This period may also be called the “cash gap” [15–20]. The aggressive strategy is designed to keep current assets low compared to current liabilities. Managers try to maintain a slight advantage of current assets over current 4. Working-Capital Management Strategies liabilities. Funds practically do not appear, as they are used to immediately settle liabilities. LiabilitiesPositive also working account capital for a and small its share, management while receivables primarily keep are kept the company at a relatively in a good high andlevel. healthy The high financial level ofcond receivablesition—“financial is because health sales” based[19,20]. on The trade literature credit are often directed reports to thatregular working customers capital and directly to low impacts credibility the comp [25,29any’s,35]. financial liquidity [20–23], profitability [24–33],The and moderate solvency, strategy which is allows about for minimizing optimizing the costs weaknesses [21,33–38]. of previousTherefore, strategies its role and and influencemaximizing on theirthe financial benefits. situation of an enterprise are enormous. There are also authors who claimWhen that analyzing working-capital individual decisions working-capital have a positive management effect strategies,on the efficiency the moderate– and ef- fectivenessconservative ofone enterprise-asset should be considered management to be optimal.[39–44]. Because Business working management capital should signifi- be cantlybased onimpacts solid, financial secure foundations; security, profits, therefore, operational the basis efficiency, for a working-capital and the process management of opti- mizingstrategy the should costs of be the a conservative enterprise, it strategy.is necessary The to main create task an optimal of managers policy is for to enterprise introduce management.appropriate modifications to each of the components of working capital in order to optimize the levelThe ofliterature net working presents capital. three main classical strategies for managing net working capital: conservative, moderate, and aggressive. The conservative strategy is to keep current assets high and short-term liabilities relatively low. Enterprises implementing this type of strategies maintain a high level of inventories and a relatively lower level of short-term receivables. Cash is also kept high.

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The first step should be to establish cooperation with a group of enterprises, e.g., as a part of a purchasing group, in order to obtain a low price of purchased goods or materials, and an attractive trade credit. The length of the trade credit is crucial for managing receivables from customers. If the company can long-term repay its liabilities to suppliers, it could build an attractive policy of managing short-term receivables, and more precisely, with trade credit. It can gain new customers through a favorable trade-credit offer, which positively affects sales revenues, which should increase. Extending the deadlines for paying off receivables is a sign of departure from the typical conservative receivables-management strategy. When managing trade credit, an enterprise should control receivables so as to not lead to a situation where the turnover of receivables in days is longer than the turnover of liabilities in days. Receivables must more quickly be transferred to the bank account, before the payment of liabilities to suppliers is due. In the case of the last element, which is inventory, companies operating, for example, within group purchasing organizations can easily, e.g., through benchmarking, improve the inventory-management process and reduce inventory levels. In addition, integration within the supply chain is not only a reduction in costs, but also an improvement of the supply system. It is a departure from a conservative towards a moderate policy. Inventories are kept high, but excess inventories are reduced. These activities allow for reducing the costs of inventory management. If an enterprise obtains a low price of goods, for example, purchased materials, through joint purchases, then lower costs appear later in the item value of goods sold at the purchase price. In this way, the company increases profits by reducing costs. The final step to optimize net working capital is in the hands of the owners. They should never withdraw all profits, but they should leave some of it in the company. The profit retained in the enterprise increases the level of equity, which increases the level of net working capital. An interesting solution from the point of view of working-capital management may be functioning within a group purchasing organization. The working-capital management strategy in such organizations is characterized by a high level of positive working capital and high profitability [35]. This is due to the scale effect and high purchasing power of this type of organization. Thanks to the group’s huge purchasing power, enterprises receive attractive prices and trade credits. This allows for extending the deadline for crediting recipients and is an incentive for new contractors to cooperate. Attractive prices of the purchased goods should increase profits. Cooperation on the line of the central unit of the group purchasing organization and individual participants leads to the optimization of the inventory level, which also has a positive effect on the level of NWC and profitability of enterprises. As part of multientity organizations, enterprises increase their competitive position, which leads to an increase in sales revenues, which is the basis for an optimal working-capital management strategy.

5. Conclusions Management of net working capital means the management of positive working capital. Its main purpose is to match the current positive working capital with the actual demand. Global research on working capital management has shown that higher levels of working capital enable companies to increase their sales volume [40]. Sales are revenues from sales, and their increase is a chance for higher profits, which may positively affect the level of equity. If profit is retained in an enterprise, such actions positively affect the added level of net working capital, and its level increases. In addition, an increase in sales means greater opportunities to obtain more favorable discounts [29,35]. Discounts are another chance to improve the level of profits if one makes early payments [26]. As a result of increasing the scale of sales, enterprises can gain greater access to free cash, which allows for taking advantage of bargains that may be unexpectedly offered by suppliers. Free financial resources are an opportunity to lower the level of bank loans of an enterprise. Encyclopedia 2021, 1 771

Moreover, additional discounts help to improve the competitive position of enterprises, so they are very important in a situation when the enterprise is fighting hard for a new contractor or tries to keep regular customers. The use of attractive discounts should attract new business partners, which should positively impact the volume of sales revenues and profits. To sum up, in order to efficiently manage working capital, managers should base their working-capital management strategies on a high volume of sales, which should improve profitability and financial security.

Funding: This research received no external funding. Conflicts of Interest: The authors declare no conflict of interest. Entry Link on the Encyclopedia: Platform: https://encyclopedia.pub/13938.

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