Working capital management
Category : Management Accounting
WORKING CAPITAL MANAGEMENT
Working capital management refers to the combined efforts of a small business owner to balance or improve the cash situation of the business. It normally will include different reports and measures taken to evaluate cash flows in and out of the business, and often entails using a third party for obtaining additional cash resources(1999).
1) Identifying cash balance which allows for the business to meet day to day expenses is critical and at the same time reduces cash holding costs.
2) Implementing an effective working capital management system is an excellent way for many companies to improve their earnings
3) Optimizing working capital results in a rapid release of liquid resources and contributes to an improvement in free cash flow and to a permanent reduction in inventory and capital costs, thereby increasing liquidity for strategic investment and debt reduction. Process optimization then helps increase profitability.
4) Striking the right balance between adequate liquidity levels and maximizing short-term investment opportunities has become an important business objective.
5) The management of working capital involves managing inventories, accounts receivable and payable and cash which is crucial for effective cash flow.