What is working capital management? It is simply a process to track and manage working capital. This involves identifying working capital sources (e.g. checking credit card statements) and ensuring that these funds are used in a timely manner.
Working capital is the money available to an organization to meet its everyday operating expenses and day to day working activities. The working capital management budget includes three major components; temporary investments, medium-term investments and long-term investments. The term “temporary” refers to investments made to cover immediate operating needs or unexpected expenses such as unexpected breakdowns of equipment or other unforeseen circumstances. Medium-term investments are also referred to as revolving loans where funds are used for the purposes of repaying existing debts that have been consolidated or for purchasing new equipment.
Long-term investments are those assets that have been accumulated over a long period of time and are expected to earn a steady income in the future. This means that the longer the asset is held, the more likely it is to earn a higher income.
Most business owners have working capital management plans in place. However, not all of them are fully effective. Some of them have been designed to improve a company’s cash flow by increasing its cash flow. Others are simply designed to ensure that there is a constant supply of funds to cover company expenses. If you think about it from a financial perspective, you can see that working capital management is really about managing an organization’s debt and assets in a manner that minimizes risks and maximizes returns.
One of the biggest challenges of working capital management is to monitor the amount of funds used in daily transactions. This is because, in today’s tight financial environment, the risk of loss to the organization far outweighs the rewards of increased cash flow. Thus, it is important to track the movement of these funds through the company so that they can be used for company purposes without unnecessarily increasing the amount of risk. There are several ways to monitor the usage of working capital funds, including bank statements, credit reports, accounts payable statements, balance sheet reports and internal reporting systems.
Accounting controls are critical to how working capital is managed. A company’s accounts payable is simply the difference between the amount of cash owed and the actual value of goods and services purchased. Accounts Payable balances are usually reported as a percentage of assets and/or liabilities. Banks and other financial institutions are required to maintain a minimum level of working capital as part of their loan agreement with a firm. In return, these institutions require repayment of an interest earned on the loaned funds.
As the volume of working capital increases, the risk of loss to the company increases as well. The goal of a working capital management plan should be to minimize the risk associated with this situation and maximize returns by minimizing the potential for loss. The balance sheet may show assets, but the amount of available funding may be less than the total assets of the business. Thus, a working capital management strategy should be designed to increase available working capital by reducing the total number of assets, increasing cash flow by reducing the size of the operating balance sheet and reducing interest expense.
To successfully implement a working capital management strategy, an organization must first establish goals. These may include a company’s ability to pay its creditors or obtain a line of credit in order to fund future working capital needs. Goals may also include reducing the amount of assets owned by the company and reducing the cost of operating the business. In addition, goals may be designed to increase cash flow, expand markets, reduce expenses, increase returns on invested capital and improve the quality of cash flow.
The objectives of working capital management may include reducing the risk associated with increased debt and asset holdings. while maximizing return on capital by minimizing loss, reducing costs associated with operating the business and increasing cash flow.
Working Capital Management is not something that can be done overnight and requires ongoing effort and dedication to ensure that the goals of working capital management are achieved. However, the benefits to the corporation are clear and immediate. When properly implemented, the advantages of working capital management provide opportunities for companies to continue to grow while minimizing the cost of borrowing and the risks associated with increasing the availability of capital.