Working Capital Management - fundamental part of the overall corporate strategy

Working capital management is the process of managing a company's short-term assets and liabilities to ensure that it can continue its operations and meet its debt obligations. Working capital is the measure of a company's efficiency and short-term financial health, referring to the part of the company's capital that is required for financing short-term or current assets such as cash, marketable securities, debtors, and inventories. It is the company's surplus of current assets over current liabilities, which measures the extent to which it can finance any increase in turnover from other fund sources. The formula for working capital is "Current Assets - Current Liabilities."

Factors that affect working capital include the nature of the business, the volume of sales, seasonality, and the length of the operating and cash cycle. Working capital can be categorized based on concept (gross working capital and net working capital) and based on time (Permanent/fixed working capital and temporary/variable working capital).

The net working capital is defined as the excess of current assets over current liabilities. Working capital mentioned in the balance sheet is an indication of the company's current solvency in repaying its creditors. That is why when companies indicate a shortage of working capital, they imply a scarcity of cash resources.

Gross working capital refers to the total amount of a company's current assets, which are those assets that can be easily converted into cash within one year or less. These assets may include cash and cash equivalents, accounts receivable, inventory, and short-term investments. Gross working capital is an important metric because it gives a company an indication of its ability to pay off its current liabilities, such as accounts payable, within a year. It also provides insight into a company's short-term liquidity and its ability to meet its day-to-day operating expenses. It is important to note that gross working capital does not consider a company's current liabilities, and as such, it does not reflect a company's net working capital. Net working capital is calculated by subtracting a company's current liabilities from its current assets and is a more accurate indicator of a company's liquidity position.

One of the key aspects of effective working capital management is to regularly analyze the company's current assets and liabilities. This helps consider unforeseen events such as changes in market conditions and competitor activities. Additionally, taking steps to increase sales income and collecting accounts receivable also improves a company's working capital. The amount of working capital a business requires depends on several factors, including the nature of the business, volume of sales, seasonality, and length of the operating and cash cycle. Generally, working capital is higher in manufacturing compared to service-based organizations. A higher volume of sales requires higher working capital, and peak seasons for sales require more working capital. A longer operating and cash cycle requires more working capital as well.

The working capital cycle (WCC) is the amount of time it takes to turn the net current assets and current liabilities into cash. The longer the cycle is, the longer a business is tying up funds in its working capital without earning any return on it. This is also one of the essential parameters to be recorded in working capital management.

In general, companies aim to maintain a healthy level of working capital to ensure that they can meet their short-term obligations and continue to operate smoothly. However, the optimal level of working capital varies depending on the industry and the individual circumstances of each company. Effective management of working capital is a fundamental part of the overall corporate strategy. The WC policies of different companies have an impact on the profitability, liquidity, and structural health of the organization. Companies that do not handle working capital well may struggle to attract the capital necessary to fund those highly visible ventures.

Working capital management is an essential component of financial management for any company. It refers to the strategies used by companies to manage their short-term assets and liabilities to ensure the company can continue its operations and meet its debt obligations as they come due. Working capital is a measure of a company's efficiency and short-term financial health, representing the capital needed to finance short-term or current assets such as cash, marketable securities, debtors, and inventories. It is a company's surplus of current assets over current liabilities, which measures the extent to which it can finance any increase in turnover from other fund sources. The funds invested in current assets keep revolving and are constantly converted into cash, which is then used in exchange for other current assets. That is why working capital is also known as revolving or circulating capital or short-term capital.

There are several approaches to working capital management. The matching or hedging approach involves matching assets and liabilities to maturities. Essentially, a company uses long-term sources to finance fixed assets and permanent current assets and short-term financing to finance temporary current assets. For example, a fixed asset that is expected to provide cash flow for 5 years should be financed by approximately 5 years long-term debts. Assuming the company needs to have additional inventories for 2 months, it will then seek short-term 2 months bank credit to match it.

The conservative approach involves having more cash on hand. Fixed and part of current assets are financed by long-term or permanent funds, which are more expensive. This approach leads to "lower risk, lower return”. The aggressive approach involves taking high risks, where short-term funds are used to a very high degree to finance current and even fixed assets.

Efficient working capital management is a fundamental part of the overall corporate strategy. The working capital policies of different companies have an impact on the profitability, liquidity, and structural health of the organization. Efficient working capital management is crucial for any company, as it directly impacts the company's ability to meet its short-term obligations and generate profits in the long term. Working capital represents the funds a company has available for day-to-day operations. Proper management of working capital ensures that a company has enough cash flow to pay its bills on time, make payroll, and purchase inventory. It also allows the company to take advantage of opportunities for growth, such as investing in new equipment or expanding its operations. In contrast, poor working capital management can lead to cash shortages, missed payments, and even bankruptcy. Therefore, effective working capital management is essential for the success and sustainability of any business.