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  • Sagar Acharjee

Working capital management techniques

The primary goal of working capital management is to ensure that a company's cash flow is sufficient to cover its short-term operating expenses as well as its short-term debt obligations. The difference between a company's current assets and current liabilities is the company's working capital. Within the next 12 months, current assets are defined as anything that can be easily converted into cash. These are the assets of the company that are extremely liquid. Short-term investments and inventory are examples of current assets. Other examples include cash and accounts receivable. Any obligations that are due within the next 12 months are considered current liabilities. The amortisation for operating expenses and current servings of long-term debt payments are examples of this type of expense. Working capital management is a critical responsibility in the field of financial administration. The cash management of a company is one type of working capital management technique to employ. Cash budgeting and cash utilisation, which are typically the responsibility of a treasury function, are concerned with maintaining the highest possible level of cash in the business. Cash budgeting is the process of forecasting a company's cash requirements by forecasting the company's expected cash receipts and payments, among other things. To ensure effective cash management, a balance must be achieved between excess and scarcity of funds because either of these extremes is expensive for the organisation in question.





Managing Cash ; Working capital management is a critical responsibility in the field of financial administration. The cash management of a company is one type of working capital management technique to employ. Cash budgeting and cash utilisation, which are typically the responsibility of a treasury function, are concerned with maintaining the highest possible level of cash in the business. Cash budgeting is the process of forecasting a company's cash requirements by forecasting the company's expected cash receipts and payments, among other things. To ensure effective cash management, a balance must be achieved between excess and scarcity of funds because either of these extremes is expensive for the organisation in question.


Inventory Management ; Inventory management within a business is another working capital management strategy. Working capital and current assets are heavily reliant on inventory and raw materials to function properly. Inventory at the optimal level can help you save money. For a business, having too much inventory can be costly, as it incurs storage costs, increases the risk of oversupply lowering the selling price, and causes stock to become obsolete. Inventory shortages can result in lower sales and a tarnished reputation for a company. One method of inventory management is the just-in-time method, which involves purchasing raw materials only when they are required by the company's operations.


In financial management, performing investment appraisals of potential investments is a critical function that must be carried out. Investment appraisal is a method by which a company assesses the attractiveness of potential investments or projects based on the findings of various financing techniques and methodologies. The monetary benefit of an investment, including expected profit and cash flow, is frequently measured using investment appraisal techniques. Effective appraisals can enable businesses to reach decisions on investment decisions; however, these decisions will need to take into account a variety of other factors, such as the impact on the company's brand image, the impact on employees, and the impact on the socioeconomic environment.


A sufficient amount of working capital is required by every business in order to run its operations smoothly. Furthermore, it must make the most of its available working capital in the most cost-effective manner. This is done in order to ensure the highest possible return on investment and the most productive utilisation of fixed assets. The ability to do so is contingent on the ability to effectively manage the various components of working capital. As a result, according to the working capital equation, current assets and current liabilities are the two most important components of working capital. Current assets are typically comprised of the following items:


· Cash and cash equivalents are two types of money.

· Inventory

· Accounts Receivable is an abbreviation for Accounts Receivable.

· Securities that can be sold on the open market

· Expenses that have been pre-paid

· Other Liquid Assets are assets that are liquid in nature.


Current liabilities, on the other hand, include:


· Accounts Payable is an abbreviation for Accounts Receivable.

· Notes Receivable

· Long-term debt is currently comprised of a portion of the current debt.

· Liabilities that have accrued

· Revenues that were not earned


A failure to properly manage one or more of these components could therefore result in severe ramifications. In some instances, this may even entail the company ceasing operations. If a company is unable to meet its short-term obligations due to a lack of cash, this is known as cash flow constraint. In a similar vein, insufficient inventories may cause production to be halted and the company to be forced to purchase raw materials at exorbitant prices. As a result, a lack of working capital can lead to the failure of a business. Ample working capital, on the other hand, provides a boost to the company's operations on days when business activity is light.


To ensure uninterrupted production of goods and the continuation of sales, a company requires funds for inventories and accounts receivable. As a result, the success or failure of a business will be determined by:


· An adequate amount of working capital

· The effectiveness with which working capital is used


That is to say, both insufficient and excessive working capital would have a negative impact on the profitability and overall operation of the company.


What is the definition of Working Capital Management?


When we talk about working capital management, we are talking about the management of current assets, current liabilities, and the relationships that exist between them. It refers to the difficulties that a company must face when managing current assets, current liabilities, and their interrelationships, among other things. Because of this, when managing working capital, a company must consider two perspectives at the same time.


· The amount of net current assets, also known as working capital, is the first.

· The second point to mention is the method of financing working capital.


The company's day-to-day operations, as a result, necessitates the expenditure of funds. Furthermore, in order to achieve the goals of profitability and liquidity, a company must maintain the highest possible level of working capital. So the goal of working capital management is to manage a company's current assets and liabilities in a way that allows it to maintain a sufficient level of working capital. When it comes to managing working capital, a company must now take certain principles into consideration. These principles include, for example, the following:


· Risk

· Return on equity

· Capital Expenditure

· Payment Expiration Date

Consequently, a company's current assets must be adequate to ensure that it is able to meet its short-term financial obligations. Similar to this, every penny invested in the pattern of working capital should result in an increase in the company's net worth.


Similarly, when managing working capital, the cost of capital should be taken into consideration. However, it should be acknowledged that as the amount of risky capital increases, so does the cost of capital. An organisation must therefore make every effort to cut the price of capital while maintaining the highest possible level of working capital. Finally, there should be as little time as possible between the maturity of debt as well as payments and the inflow of cash. The greater the disparity between the two, the greater the risk involved.


Managing Working Capital: Techniques and Strategies

In order to effectively manage a company's working capital, it is necessary to consider a variety of factors such as accounts receivable, cash, inventory, and so on. Let's take a look at how each of these components is managed individually in order to maintain the highest possible level of working capital.


Inventory Control is number one on the list.

For many businesses, inventory is one of the most important components of their overall working capital. The following items are included in the inventory:


· Finished goods that a company makes available for purchase.

· Components that are used in the production of finished goods (raw materials, work in progress, and so on)


Raw materials are the inputs used in the manufacturing of goods that, after some processing, are transformed into finished products. Finished goods, on the other hand, are products that are ready to be sold once they have been manufactured. Now, the type of inventories to maintain and the amount of components to keep on hand are determined by the nature of the business. Last but not least, inventories are an important component of a company's current assets. As a result, inventory management must be done efficiently and effectively in a business.


Inventory management refers to the process of investing the maximum amount of working capital possible in inventories. This implies that the investment is neither too low nor too high in comparison to the market. The lack of sufficient investment in inventories causes the manufacturing process to stall. Excessive investment in inventories, on the other hand, results in a blockage of funds. As a result, neither an insufficient nor an excessive investment in inventories should be made. This implies that a company must determine and maintain the optimal level of inventory.


A business employs a variety of techniques to determine the optimal level of inventory to maintain. These are some examples:


· Order Quantity at a Reasonable Price

· Analyze the ABCs

· It came at the right time.

· Inventory Turnover Ratio is a measure of how quickly a company's inventory turns over.


Managing Cash Flows ; Cash is the most liquid of all current assets because it is the most readily available. All current assets, such as receivables and inventory, will eventually be converted into cash if they are not sold. The proper management of cash is, therefore, of paramount importance. Working capital management, in addition to cash management, is an important component of financial management. Coins, currency, draughts, cheques, and bank deposits are all examples of cash. Furthermore, it includes marketable securities, which can be easily converted into cash when the time comes. So cash plays an important role in the management of current assets. Therefore, a company's current assets should always be sufficient to cover its operating expenses. Cash should be neither insufficient nor excessive, according to this rule. This is due to the fact that insufficient cash would halt production. Excess cash, on the other hand, will sit idle and have a negative impact on the profitability of the company.


As a result, managing cash is essential for a company's ability to manage its working capital. Now, the fundamental goals of cash management are as follows:


· Obligated to make payments when they are due

· To keep cash sitting idle as much as possible


For this reason, a business can implement the following strategies in order to efficiently manage its cash:


· Cash budgets can be prepared by businesses in order to forecast cash flows. Cash budgets can assist a company in planning for and controlling the use of cash.

· When comparing risk and profitability, a company must determine the optimal level of cash on hand to operate efficiently. To determine the optimal level of cash, a variety of methods are employed.

· The business can make plans for how it will make use of the cash resources that are currently available. This can be accomplished after the cash flow projections and optimum cash balances have been determined. As a result, a company can concentrate on either increasing cash inflows or decreasing cash outflows.


Accounts Receivable Management ; Accounts receivable are debtors who owe money to the company as a result of the sale of goods on credit to customers. A company's ability to sell goods on credit is critical to its ability to grow its sales and attract new customers. Undertaking credit sales, on the other hand, carries a certain amount of risk. The risk of bad debts is referred to as this risk. Thus, a company's accounts receivable must be managed in order to increase the overall return on those accounts receivable. This implies that the amount of money spent on accounts receivable must be kept to a minimum. It is accomplished by weighing the benefits of maintaining such receivables against the costs of doing so. As a result, an excessive amount of money is invested in accounts receivable, which increases sales. However, this increases the likelihood of bad debts. In contrast, a lack of investment in accounts receivable results in a reduction in sales as well as a higher risk of default on debts. Thus, in order to effectively manage receivables, a business must weigh the costs of maintaining accounts receivable against the benefits of doing so. In order to effectively manage its accounts receivable, a company can implement the following procedures:


· In order to extend credit to customers, it is necessary to clearly define credit policy. This includes establishing credit standards and credit terms, as well as offering discounts and assessing the credit risk of prospective customers and vendors.

· Complying with a credit collection policy that assists a business in collecting payments when they become due

· Accounts receivable are constantly being monitored to determine whether or not the customers are paying according the credit terms.