Working Capital management
Working capital management refers to the decisions relating to working capital and short-term financing. The goal of working capital management is to ensure that the company is able to continue its operations and that it has sufficient cash flow to satisfy the short-term debt and operating expenses. These involve managing the current assets and the current liabilities of the company.
Most common policies and techniques for the management of working capital are:
- Cash management: identify the optimal balance. This allows a business to meet day to day expenses and payments, but reduces cash holding cost;
- Inventory management: identify the optimal level of inventory. This allows a business continue uninterrupted its production but reduces the investment in raw materials, minimizes reordering cost and hence increase cash flow;
- Debtors management: identify the appropriate credit policy. This allows a business to use credit terms which will attract more customers but the impact on cash flow will be offset by increased revenues;
- Short term financing: identify the appropriate source of financing, by choosing between supplier credit (ideal for inventory financing), bank loan or factoring (accounts receivable financing), or create a mix of financing.
A company can be endowed with assets and profitability but short of liquidity if these assets cannot readily be converted into cash.
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