Working capital management therefore remains one of the key subtopics of financial management in any business organization. It covers the process of managing the assets and equities of a company in the present so as to earn the maximum profits while posing the least risks possible. The purpose of this online article is to look at the aspects of WCM, the approach to that and all the methodologies that will be used in the discussion of the subject as well as the centrality of this aspect to a company.
What is Working Capital?
This is capital available with a business organization to fund daily operational activities such as employee remunerations, suppliers and other legitimate demand for credit. It can be computed by netting out current assets from total current liabilities. The formula is:
Working Capital = Total current assets, goods which can be sold soon or services which will be rendered shortly for cash, Total current liabilities, sums owed in the present period and payable within one year.
On a basic level, working capital is equal to the sum of the amount of current assets that a business has to accomplish its daily activities. When working capital is greater than zero, it means the organization’s current assets are greater than current liabilities; when the figure is negative, it means the organization is possibly facing some problems in meeting its obligation.
Significance of Working Capital Management:
Working capital is another important indicator that defines the company’s financial potential and efficiency of its management. Working capital is useful in the sense that it can guarantee that the company has enough financial resources to carry out its business as well as fund expansion. Also, when it comes to working capital, strong working capital management increases company competitiveness through better and more timely supplies of goods and services, enhanced customer satisfaction, and minimized risk of financial stress.
Methods and Approaches to WCM
Working capital management constitutes several processes and activities that concern effective control of current assets and liabilities. Some of the most common techniques include:
1. Inventory Management
Inventory management is a subcategory of working capital management since it holds a critical spot in the financial process. The excess inventory cost can be avoided while at the same time Ordering point which ensures that the company has enough stock to supply its customers. This can be done by the following methods such as just in time (JIT) inventory, economic ordering qty (EOQ) and the ABC analysis.
2. Accounts receivables management
Accounts receivable is part of working capital management since it has a close relationship with the company’s cash flow. Some measures that firms can take to enhance the account receivables management include giving discount to anyone who pays before the agreed time, clearly stating payment terms, and credit checks and payment guarantors for customers seen as being high risks.
3. Accounts Payable Management
Accounts payable is the other subtopic of working capital management that involves managing other people’s money. Thus, various ways of improving companies’ cash flow and working capital, such as achieving better payment terms from the suppliers and optimizing the payment timing, are clearly seen. It could benefit from suppliers’ relationship management; dynamic discounting methods and payments cycle optimization.
4. Working Capital Financing
At other times that firm may require to obtain more working capital to fund short term requirements. In such circumstances working capital financing is a suitable solution available for the firm. The various working capital financing are bank loans, line of credit, cash flow financing, and factoring.
5. Cash Flow Management
Working capital management comprises cash flow management since it provides information on the movement of cash within an enterprise. Cash flow statement helps companies to find out trends, understand the efficiency of working capital management and take effective decisions in right direction for the company’s better future.
A consideration of the Difficulties in Working Capital Management
In as much as working capital is critical to the success of a firm; working capital management is not without its pitfalls. Some of the common challenges include:
1. Seasonal Fluctuations
Seasonal industries can present difficulties for businesses striving to keep their working capital adequate at all times of the year. This demands proper forecasting, budgeting and planning so that the business must possess adequate working capital during the periods of sale, yet again have, proper control of cash in periods of low sales.
2. Credit Risk
It must be admitted that credit risk is one of the most important components in the working capital management because its examination influences the accounts receivable. Firms need to have proper well-chosen credit policies, do accurate credit checks, and frame right payment terms in order to prevent these debts.
3. Inventory Obsolescence
A large quantity of inventory in stock must be financed with a company’s working capital, which is an extremely costly practice. Organizations should ensure that they balance on their inventory and mitigate any risks that come with inventory management through adopting new inventory management approaches and market trends with our customers.
4. Economic Factors
Inflation, interest rates and exchange rates are other economic factors that can pose a big threat to the working capital position of an organization. Companies require to be aware of the trends in economy and align their working capital management effectively. You can contact us here.
Conclusion
Working capital management is therefore a key aspect of efficiency in the running of any firm. The following are specific subtopics common in relation to the working capital management: If Organizations would familiarize themselves with this various methods and approaches for working capital management, they would be in a position to coordinate various current assets and current liabilities, enhancing cash Converter and maintaining competitive advantage in the market.
However, there are some challenges that companies face while managing working capital and the important aspect of planning and forecasting along with the risk management of the working capital can also lead to the right growth of the companies
