Managing Working Capital
As we all know the concept of working capital , Its simply means Current Asset Minus Current Liability. But I am here talk about managing and financing working capital
Working capital is a highly effective barometer of a company’s operational and financial efficiency, effectiveness and control . The better its condition, the better positioned a company is to focus on its core business and customers. By addressing the drivers of working capital, we can sure to reap significant operating cost and customer service improvement. The objectives of working capital management, in addition to ensuring that the company has enough cash to cover its expenses and debt, are minimizing the cost of money spent on working capital, and maximizing the return on asset investments.
As we all know working capital management is a business strategy designed to ensure that a company operates efficiently by monitoring and using its current assets and liabilities to the best effect. The primary purpose of working capital management is to enable the company to maintain sufficient cash flow to meet its short-term operating costs and short-term debt obligations Determination of appropriate level of investment in current assets is the first and foremost responsibility of a working capital management
Lets discuss some of the important points related to better managing the working capital such as
1. Liquidity: A consistently high level of working capital, organizations ensure that adequate cash levels are available for any potential upcoming opportunities or unanticipated scenarios and expand and invest in new products at a faster rate.
2. Operational Efficiency: Optimum use of working capital management evades any future hindrances in business operations.
3. Up in Profits: A high level of working capital is only achieved when areas including Accounts Payable and Receivable are operating efficiently. In order for both to operate in an efficient manner, We need to ensure that we pay suppliers as per the agreed terms, which lead to the capturing of early payment discounts and increase the income and getting the payment from customers by the due date or early .
We always see the cost benefit aspects of prompt payments , As in case of accounts receivable when the payment to be received later ,the resultant loss of interest and opportunity cost , depending upon the period and terms of credit
4.Achieving the Correct Level of Working Capital :In spite of the importance of consistently maintaining a high level of working capital. It should not be too high which can impact profitability
5. Inventories : Maintain correct level of inventory for sale . No use of creating huge inventory which will blocking the working capital
Another important dimension of working capital management is determining the mix of finance for working capital which may be combination of spontaneous, short-term and long-term credit and other instance as the firm makes purchase of raw materials and supplies, trade credit is often made available spontaneously as per trade terms from the firm’s suppliers. In addition to trade credit, wages and salaries payable, accrued interest and accrued taxes also provide the firm with valuable source of spontaneous financing.