As the name suggests, working capital management refers to the efforts of managing your working capital. It identifies the company's financial health and success as a business. Working capital itself refers to the money that is the company's current assets and current liabilities or debts. In other words, a good working capital management determines the growth, profitability and liquidity of the company. Learn more about working capital here.
Objectives of Working Capital Management
The main goal of working capital management is to ensure that the company is able to continue operating. Along with that, able to satisfy the short-term debt and upcoming operational expenses. Some other objectives of working capital management are:
Working Capital Balance: Calculated from the ratio of working capital management, current assets divided by current liabilities. The lower the value of this ratio, the more it shows that the company is financially unstable to clear its debts. The higher the value, however, suggests that company has too many inventories not in cash.
Avoid Over-borrowing: A well-built working capital management will give your business a warning sign where you can put your control towards what you can purchase or towards business expansions.
Optimize Working Capital Cycle: The cycle includes collecting raw materials and other initial investments, production, selling goods as soon as possible and collecting receivables on time.
Maximize Current Asset Investment's Return: Aims to obtain the maximum investment in current assets to ensure higher profitability.
Maintain Relation with Suppliers/Providers: It is more likely for the lenders, suppliers, providers, also non-trade creditors to be more interested in doing a business with you when you have a defined working capital management.
Importance of Working Capital Management
Working capital management is important due to the following reasons:
Improve Company's Credit Profile: A managed working capital is more likely to pay off the debts on time. This results in a higher credit score for the company.
Ability to Face Crises: Proper working capital management allows businesses to be able to face crises properly during emergency periods like depression.
Expansion: Additional capital is required if a company plans to expand. Adequate management of working capital could lead the expansion program successfully.
Working Capital Management Techniques
Manage Inventory and Procurement: Over-stocking can be a burden on the business' cash. Contrarily, insufficient stock can result in damage to customer relationships and loss of sales. The challenge for companies is to establish optimum stock levels. Hence, it is important to control what is purchased.
"Investing in procurement automation solutions can greatly boost working capital."Mary Duffy, Group Financial Controller
Improve Receivable Process: This can be done by sending out invoices as soon as possible. Reassess invoicing process that may be causing delays in sending the invoice to your debtors such as manual processing, lost invoices, etc.
Manage Debtors Effectively: Besides sending out invoices on time, it is important to be receiving payments on time. Reassess your contracts and credit terms with debtors may be necessary to make sure you are not giving debtors too big a window to pay for goods and services – as this may be impacting negatively on your own company’s cash flow.
Pay Vendors on Time: Companies that pay on time tend to develop a better relationship with their suppliers and have higher chances to negotiate better deals, payment terms and discounts. If you keep your suppliers happy, it could save you money in the long run when it comes to getting larger discounts of bulk buying, maximizing the credit period, and recurring orders.
Working capital management requires great attention and care due to the interactions between its components. It contributes to whether the company is able to be successful in the long run in terms of managing inventories, accounts receivable and payable, and cash.At Aspire, we envision a world where business owners have fast and simple access to the funding they need to grow. That’s why we’re on a mission to re-invent banking for SMEs across Southeast Asia. Our current product provides SME and startup owners in Singapore with financial flexibility through a line of credit of up to S$150k. Which, can also be used to make business payments to enjoy 60 days free credit terms. With no monthly fees or obligations to withdraw, you only pay interest on the amount you end up using. Opening an account is free and can be done online here.
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