Successful businesses aim to strike a balance between funds set aside for current assets and the risk of current asset shortages. Each company has different needs for working capital. Retail enterprises, for example, may need a lot of inventory and receivables, but software companies might not.

Companies will define their ideal levels of inventories, receivables, and payables as a function of sales to estimate their working capital needs.

After establishing its need for working capital, a business decides on the best combination of short- and long-term financing to buy the current assets it needs while maintaining enough financial flexibility during challenging times.

Working capital management strategies can range from conservative to aggressive, depending on the company.

With a conservative approach, the company holds greater holdings in cash, receivables, and inventory in relation to sales, giving it the flexibility to react to unanticipated occurrences.

In an aggressive strategy, smaller investments in current assets are held. However, in exchange for greater equity returns, this limits the company's short-term flexibility. The moderate approach holds a position between the aggressive and conservative approaches.

The financial impact of a company's working capital strategy is assessed using the DuPont equation, where:

ROE = (Net Income / Revenue) x (Revenue / Average Total Assets) x (Average Total Assets / Average Shareholder Equity)

All things being equal, a company's total asset turnover will rise when working capital investments are decreased, enhancing returns on equity. You may achieve this by:

• using just-in-time inventory management, which lowers a company's stock of inventory
• requesting quicker payments from clients and
• accelerating cash collections.

Companies might utilize daily or monthly cash budgets to cover their short-term obligations.

A company's working capital policies and marketing strategies could conflict with each other. Increased sales will result from marketing initiatives like extending more credit or offering more lenient credit conditions, but they will also result in higher accounts receivable and, ultimately, uncollectible receivables.