The basic calculation of working capital is based on the entity's gross current assets.
These accounts represent the areas of the business where managers have the most direct impact: The current portion of debt (payable within 12 months) is critical because it represents a short-term claim to current assets and is often secured by long-term assets.
Common types of short-term debt are bank loans and lines of credit.
The working capital cycle (WCC), also known as the cash conversion cycle, is the amount of time it takes to turn the net current assets and current liabilities into cash.
Companies strive to reduce their working capital cycle by collecting receivables quicker or sometimes stretching accounts payable.
Under certain conditions, minimizing working capital might adversely affect the company's ability to realize profitability, e.g. when unforeseen hikes in demand exceed inventories, or when a shortfall in cash restricts the company's ability to acquire trade or production inputs.
Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.
By definition, working capital management entails short-term decisions—generally, relating to the next one-year period—which are "reversible".