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Working Capital Management$
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Lorenzo Preve and Virginia Sarria-Allende

Print publication date: 2010

Print ISBN-13: 9780199737413

Published to Oxford Scholarship Online: May 2010

DOI: 10.1093/acprof:oso/9780199737413.001.0001

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Working Capital

Working Capital

(p.14) 2 Working Capital
Working Capital Management

Lorenzo A. Preve (Contributor Webpage)

Virginia Sarria-Allende (Contributor Webpage)

Oxford University Press

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

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