A. Target working capital refers to the optimal level of a company’s current assets and liabilities that is required to support its ongoing operations and growth. It is the ideal balance of a company’s short-term assets and liabilities that is needed to meet its operational and financial needs.
Target working capital is typically determined by analyzing a company’s historical performance, industry benchmarks, and future growth plans. It is the balance that a company aims to maintain to ensure that it has enough cash and other liquid assets to meet its short-term obligations, such as paying its bills and meeting its payroll, while also having enough resources to invest in growth opportunities.
It is usually calculated by taking into account a company’s current assets such as cash, marketable securities, accounts receivable, and inventory, and subtracting its current liabilities, such as accounts payable, short-term debt, and accrued expenses. The resulting amount represents the target working capital.
For example, if a company aims to have ₹10,00,000 in current assets and ₹7,00,000 in current liabilities, its target working capital would be $300,000. This means that the company aims to maintain ₹300,000 in working capital to support its operations and growth.
It’s important to note that target working capital can change over time, as a company’s operations and growth plans evolve. Therefore, it’s important for companies to regularly review and adjust their target working capital levels to ensure that they are in line with their current needs.
