Working Capital Management
We know that timely working capital management within a business is critical to ensure cash optimisation.
Our Digital CFOs ensure their clients working capital is structured, monitored and optimised.
Never has this been more important than following the Coronavirus crisis.
Working capital management is essentially an accounting strategy with a focus on the maintenance of a sufficient balance between a company's current assets and liabilities. An effective working capital management system helps businesses not only cover their financial obligations but also boost their earnings
Regardless of a company’s size or industry sector, working capital is an important metric in assessing the long-term financial health of the business.
The level of working capital available to an organisation can be measured by comparing its current assets against current liabilities. This tells the business the short-term liquid assets remaining after short-term liabilities have been paid off.
The Covid-19 pandemic has raised significant working capital challenges and uncertainties for organisations. Supply chain disruptions have been a major challenge, along with changing consumer demands and the collection of receivables.
Generally, companies will strive to achieve a high level of working capital. Having a high level of working capital indicates a well-managed company with a greater potential for growth. There are also several benefits to having a high level of working capital including improved liquidity, operational efficiency, and increased profits.
Working Capital management is particularly important since it is an accurate barometer for assessing the long-term financial health of a business and ensures that adequate cash flow is always maintained to meet its short-term commitments. In times of economic uncertainty, having such financial protection is vitally important. Managing working capital effectively should therefore be a top priority for any organisation, now, more so than ever.
Benefits of Positive Working Capital
By obtaining a consistently high level of working capital, organisations ensure that adequate cash levels are available for any potential upcoming opportunities or unanticipated scenarios. It also gives organisations more flexibility over how they run their operations, which enables them to fulfil customer orders, expand and invest in new products at a faster rate.
Optimum use of working capital management evades any future hindrances in business operations. A ‘safety net’ is available to protect against lack of production or delays in payments received.
A high level of working capital is only achieved when areas including Accounts Payable and Receivable are operating efficiently. In order for both departments to operate in an efficient manner, they need to ensure that they pay their vendors as per the agreed terms, which lead to the capturing of early payment discounts and increase the income of cash.
Achieving the Correct Level of Working Capital
In spite of the importance of consistently maintaining a high level of working capital, it is also important to understand that there is a level considered ‘too high’.
Having an extremely high level on an on-going basis can indicate that there is more money within the organisation than is needed – that cash is not being invested correctly or company growth is being neglected in favour of high liquidity.
The key is to consistently maintain positive working capital, but avoid reaching too high a level that leads to waste and inefficiency.
Before undertaking strategical changes to effectively manage your working capital, Our Digital CFOs will work with you to look at the current working capital trends in order to see where mistakes and gains have already been made.