Working capital means a company’s current assets minus their current liabilities. This factor is the essential one to judge the credibility and sustainability of a business. It maintains the balance of current assets for immediate requirement of cash and the current liabilities for the payment of the dues and obligations of the business.
The company’s management level needs to take care of the working capital requirements and the balance of this working capital function on the whole. This managerial strategy of managing it efficiently is called as working Capital Management. The goodwill of a business lies in the way the working capital balance is maintained will determine the company’s growth, profitability, and liquidity.
What is the purpose of working capital management?
The key factor of this concept is to optimize costs and reduce risks in a business. So let us look into the key considerations of how to accomplish this.
- Vision and strategy for improving working capital: highly efficient organizations find the calculative economic benefits from improving working capital management by linking them to strategic goals. The support of executive level and their involvement for working capital optimization is the prerequisite for a reducing amount of cash invested in a business.Standard financial transaction and centralization will prove the efficiency of the business. Also, there should be a cross-functional approach to all the components.
- Analytics and measure to enable working capital management: finding out the relevant date and using the actual components is the basis for a proper working capital decision making. Best practice practices are from the use of data through ERP systems which gives relevant and actual data calculation which are maintained on a regular basis. Also, the exact tools of business analytics are used for finding the components of working capital assessment. Also, the employees of the company are educated to use the various metrics and measures to calculate working capital.
- Performance management principles and measuring process improvement: like the importance of calculation, the continuous process improvement of the principles and practices are also equally important in working capital decision. This involves continuous and quality procedures. Maintain a quality in the steps of process improvement from the beginning is a key to proper working capital management.
- Information technology strategy and application: every business takes that real form with the use of proper technology features that help in tuning the business in easy ways. These help for self-understanding the business implication for better task implementation.