What Are The Aspects Of Working Capital Management?
Working capital is the difference between a company’s current assets and current liabilities. It is a crucial metric that helps evaluate the business’s long-term financial health.
Individuals involved in business must know the components of working capital movements quickly. Therefore, it requires proper management, known as working capital management, as improper handling of working capital can lead to a scarcity of resources.
To excel in working capital management, business persons need to understand the aspects of working capital management. Read on to learn about the elements of working capital management.
Aspects Of Working Capital Management
Working capital consists of two major elements, gross working capital and net working capital. Gross working capital refers to the sum of all working capital. On the other hand, net working capital refers to the difference between current assets and current liabilities.
Following are the aspects of working capital management:
Management of Accounts Receivables
Accounts receivable refers to the balance of money that an organisation is yet to receive for the goods and services offered to its customers. Accounts receivables are presented on the balance sheet as a current asset.
However, organisations must collect money from their clients to get the status of a current asset. Hence, companies must collect payment timely after the stipulated period.
This metric helps get a rough idea regarding the days required for a company to collect cash. Proper accounts receivables management is necessary to ensure companies need not run out of money to pay vendors or suppliers. Accounts receivable is an integral part of an organisation’s asset as it helps to generate cash in-flow and register it in the book of accounts.
When business persons need immediate cash but cannot wait for their clients or customers to pay, they can opt for Invoice Discounting as a practical working capital solution.
Individuals involved in business can increase their cash inflows by pledging unpaid invoices, i.e., a company’s accounts receivables and get cash instantly. Renowned working capital solution providers like KredX provides working capital solutions at their digital platform. After successful submission and verification of invoices, business persons can receive funds within 24-72 hours.
Management of Accounts Payable
Businesspersons has to manage working capital efficiently to supervise accounts receivables strategically.
Accounts payable refers to the money an organisation must pay other companies for the goods and services. Accounts payable is an important aspect of working capital management.
To manage working capital efficiently, companies must balance both payables and receivables. Increasing accounts payable will not change the company’s working capital as it will still show the amount as a liability on the balance sheet.
In addition, holding money for too long can compel liable companies to pay more as late fee, which can further impact credit ranking. Increasing accounts payable will not change the company’s working capital as it will still show the amount as a liability on the balance sheet. In addition, holding money for too long can compel liable companies to pay more as of late fee, which can further impact credit ranking.
Hence, late payment or improper handling of accounts payable may increase cash flow or total assets available, but this practice can affect supplier and buyer relationships.
Management of Inventory
For any company, inventory is the primary asset that converts investment or asset into sales revenue. Inventories refer to raw materials that businesses or organisations hold for reselling, manufacturing or utilisation. Often investors check the inventory turnover ratio to assess the strength of the sales of a company and its efficiency in purchasing and manufacturing.
Companies often sell inventory to pay for bills, expenses and increase working capital. Even some companies often utilise accounts payable to purchase inventory.
Thus, it is clear that inventory can affect both assets and liability. However, while managing inventory, business persons must know that there are different types of inventory. For instance, manufacturing companies have raw materials, partially finished goods and finished goods as raw materials. While financial accounting reports finished goods on financial statements, management accounting reviews all kinds of inventory.
Hence, it is essential to manage inventory to enhance working capital management.
Working capital management ensures a perfect balance between short-term assets and short-term liabilities. The primary objective of working capital management is to enable an organisation to adeptly handle day-to-day operations and simultaneously invest an organisation’s assets most fruitfully.
For this, every business person must have comprehensive knowledge regarding working capital management, i.e., the management of accounts receivables, accounts payable and inventory.