Working Capital Management refers to the set of corporate finance activities that deal with the short-term financing requirements of a business.
The key goal of working capital management is to ensure that the company has sufficient funds to carry out its day-to-day operations and meet its short-term debt obligations. Working capital management also ensures that the company’s funds are invested in the most effective way.
The working capital represents the operating liquidity available to the business and net working capital is calculated as the firm’s current assets minus the current liabilities.
Working capital is an important aspect of running a business because a firm may be rich in assets and may be very profitable, but it still may not have enough liquidity to meet its day-to-day expenses.
A firm needs to manage its working capital effectively by balancing various aspects of short-term finance such as maintaining optimal levels of cash, managing inventory and accounts receivables, and controlling accounts payables and other expenses. To enable this, a company’s management will use a combination of policies and techniques. The company will have policies for management of cash, inventory, credit policies for management of debtors, etc. The company will also identify and use short-term sources of finance suitable for them.
The working capital needs of a company may also change from time to time and are affected by many internal and external factors. Internal factors include, the size of the company, growth rate, the structure of the organization, and how effective the company is in managing working capital. External factors include interest rates, current economic conditions, use of technology, competition, and so on.
In the following articles, we will look at the various aspects of working capital management and how to effectively manage the working capital of a business.