Effective working capital management should also be an important goal of a business, and a sound strategy towards it keeps the business out of financial troubles.
Working capital is a representation of company efficiency, and is the operating liquidity that a business has. Working capital includes the fixed and current assets, and is calculated by subtracting the current liabilities (wages, unearned revenues, and accounts payable) from the current assets.
Management of Working Capital: Why You Need A Strategy
The management of the working capital includes the management of the accounts receivable, inventories, and cash, while also calculating the accounts payable. When an organization fails to manage working capital properly, it suffers from losses.
Shortage of funds can cause bankruptcy or insolvency also. Hence rather than being a proposition, having a strategy for working capital is rather a necessity for a business manager. Some of the benefits of the right working capital strategy include:
- Achievement of short-term and long-term goals
- Ensures that the manager meets the goals of the business
- Achieving of profits
- Positive reputation
A debt does not remain hidden from the outside world, and the news of bankruptcy of a company travels faster than what many assume. Your business will be able to keep its reputation intact when it pays its dues in time, and always has cash and inventory ready for short term purposes.
Even when business nears insolvency while not actually going bankrupt, the news is quite disheartening for the investors, and the company stocks may plummet without notice. It would take years for the managers to reinstall trust and confidence in the investors again. The attention paid towards the management of working capital, hence makes the business stable as well.
The Right Working Capital Strategy
An appropriate or right working capital strategy focuses on different aspects of finances and investments. Many businesses are profitable during the recession times also. A manager can get profits and gains, by having and applying a strategy towards working capital. Some of the fine points include:
Better cash management: So that the business can have lesser costs spent towards holding cash.
Better inventory management: So that the business has optimal inventory, thereby escaping overstocking of the finished goods. The inventory capital can be managed so that there are minimum reordering costs while having uninterrupted production. Similarly, the supply chain investments should also be optimized, in order to expedite the product deliveries and lower delivery failure instances.
Credit management: A suitable credit policy can attract more customers, increase revenues, and ensure a better cash flow and profit margin. The impact of the credits on the cash flows will be offset by the higher revenues, and the business may get better ROI.
Financing: Before taking any new loans, or falling into debt, it is better to use the older loans and convert all the credits given to debtors to cash.
Adjusting To The Situation At Hand
While it is good to settle debts early, there may be other more relevant payments due, or better investment opportunities available. For instance, when the supplier is not providing any “early settlement discounts”, there is no point in making the payment early, provided there are no fringe benefits. Cash should be spent according to the priorities and the situation at hand so that the most immediate tasks get the due attention and preference.
Foreseeing The Future: You Might Need More Than What You Think
The financial world has its own set of turmoil, and it is a fact that every business experiences down times. It is good to invest the profits, but there should be some reserved cash, which can be used in times of crisis. The manager should search for investment avenues that also offer the option of ready cash, when in need.
Quality Formations Limited partners with the best of financial organizations and banks, which offer all financial assurance and security that a business would need.
The benefits of working capital management are many. By having the right strategy, you will avoid losses, and would never have to plead to the loan providers and suppliers, among other creditors. “Money Saved is Money Earned”. You may be astonished by the savings you make, by having the appropriate working capital strategy.