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.
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