Working Capital Management

Working capital was not getting the due importance in the past by the companies. The companies were concerned in raising funds through equity and were focusing on choosing information and manufacturing technologies to operate their business and sold their products by developing domestic and global marketing strategies. These global factors have paved way for companies to improve profitability, to reduce costs and to make business efficient.

Working capital, a positive component of the balance sheet is considered as a store of value to repay the loans borrowed by the companies. While lending money, the bankers look for financial ratios and other numbers that surpass the preset standards. In the past, this demand was to enable the bank to force a company to borrow to put more cash on the balance sheet, thereby growing the bank’s loan portfolio.

In modern times, working capital is considered as a hindrance on the financial performance. Current assets block the performance of a company as they do not contribute to Return on Equity. Current assets hide the obsolete inventory which cannot be sold and receivables that may not be collectible. The emphasis now is on reducing current asset accounts to the point that current liabilities can be funded from the ongoing operations of the business.

The essence of cost management is the efficient design of an entire business process, not a single step or action within that process. The basic methodology advocated is a multiphase approach:-

Develop a baseline for the all-in cost for the full timeline of an existing business process

Analyze and cost multiple alternate scenarios for handling that process

Specify non-quantifiable factors and select the most appropriate scenario

Funds which are in the process of collection or disbursement is called as a float. The company has to spend a lot to recollect the money which is delayed unnecessarily. Savings opportunities should be examined at every step of the cash-flow timeline. Processing expenses are similarly important, as each transaction along the timeline – whether performed internally or outsourced – has a cost that directly affects your profitability.