Businesses rely on working capital management to ensure that operations are running efficiently. In other words, companies rely on established cash flow methods to ensure that monthly goals are kept in line.
Given the importance of capital management, it is essential to ensure that their system is both strong and efficient. Failure to do so could potentially cost the company down the line, especially in terms of wasted resources.
What Is Working Capital Management?
Working capital management is a way for businesses to manage their current assets (finances, inventory, property, etc.). Through careful management, companies can ensure that they have an adequate cash flow, which allows them to handle current and future projects, goals, and operational needs.
Working capital management comprises three parts: Accounts payable, accounts receivable, and inventory management. It’s critical to note that working capital management is primarily concerned with current assets instead of current liabilities (debt).
When trying to assess whether a business is effectively handling working capital management, look to inventory management. A company should have a steady turnover of inventory.
In other words, a business wants to constantly have their product selling. Selling products don’t sit around on shelves or in warehouses and thus need constant replenishment. This is a sign of a strong business, as there’s less idle inventory available.
Remember that every inventory item signifies a potential sale. Thus, one wants to see steady movement as an indication of solid cash flow.
The next part worth assessing is the actual cash itself. More importantly, one should look at how the cash itself flows. This is arguably the most crucial aspect of working capital management.
First, look at a company’s existing debt. Is it getting paid off regularly? Next, consider monthly and recurring bills – are payments sent out consistently? If the answer is yes to both questions, the company has a strong sense of cash flow and ensures that the optimum cash level is being maintained.
That may sound counterintuitive, but recall that part of the goal for cash management is ensuring that there’s minimum idle cash while also taking care of essential business expenses such as debt and bills.