Credit Risks in Working Capital

Working capital credit risks lead to liquidity problems, which in turn, could result in non-settlement of bank liabilities, suppliers and other creditors. This chapter examines the nature of working capital, as the first step to understanding the major credit risks involved. The balance sheet shows the working capital as on a particular day and we have to assume this as the average situation for the year/period, given the dynamic nature of working capital. Before looking into the working capital cycle in detail, the chapter examines a few important working capital ratios. Working capital cycle' refers to the time taken for the business activity (or operation) to complete its course. Those who are involved in corporate finance, finance management or financing of business know that working capital problems are different from fixed capital problems. Banks and other short-term credit institutions are the major suppliers of working capital finance.