Current capital is used to pay for daily operating expenses, which is why it is also aptly known as working capital. The more current capital a business has, the more liquid it is. This means that the business is able to meet its short-term financial obligations. Therefore, investors are more likely to view a company with much current capital as stable and conducive for investments.
The same conclusion cannot necessarily be made for current assets. It is possible for a company to earn a lot of revenue, but still have a working capital deficit, which means that the company’s liability is still greater than its current assets. A company’s current capital is thus a more reliable figure to rely on, because it is inherently free from debt obligations.
Working capital or current capital management involves making decisions that affect the relationship of a company’s current assets with its current liabilities. This is in the interest of ensuring ample cash flow for day-to-day operational expenses. Such decisions only cover the current operating cycle. They are implemented on a short-term basis and are easy to change if desired. Cash management falls under this–it is simply the identification of the amount necessary for a business to meet its daily operating needs. Inventory management, on the other hand, aims to reduce costs incurred from reordering and investing in raw materials. This is done by determining just how much inventory will be sufficient for continuous production. Short-term financing could also be an option for ensuring steady cash flow.
