Working Capital Management
Working capital refers to the cash a business requires for day-to-day operations, or more specifically, for financing the conversion of raw materials into finished goods, which a company sells for payment. Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The importance of a well-rounded working capital cycle is crucial in today's business environment.
Importance of Working Capital Management
The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient abilities to satisfy both maturing short-term debt and upcoming operational expenses. Simply put, good management of working capital will generate cash, which will help improve profits and reduce risks (White Paper-Managing Working Capital, 2003). Among the most important items of working capital management are controlling levels of inventory, accounts receivables, accounts payables and cash. Analysts look at these items for signs of a company's efficiency and financial strength.
"When it comes to managing working capital - TIME IS MONEY" (2003).
Working Capital Policies
Working capital policy is reflected in current ratio, turnover of cash and securities, inventory turnover and days sales outstanding (DSO). Not all companies are the same and to decide on the level of each type of current asset to hold and how to finance current assets depends on the industry a business is in. A business with a good or negative working capital management policy is a restaurant. The time between when the cash disbursements are made and the cash is collected is less than a day. This business has an 18-24-hour cash flow cycle. Another example is a retailer that holds a JIT inventory system and ideally their sales are made on a cash or credit basis.
Manufacturing companies have a considerably longer operating and...