Working capital management refers to the decisions and managing the working capital during the normal course of business operational activities. This involves managing the relationship between a company’s current assets and current liabilities.
The main aim of Working capital management is to ensure that the company utilizes the working capital properly and generates sufficient cash from the business to satisfy all the short term liabilities. The ultimate goal is to generate profits and increase the value of the company.
Management of working capital
There are some important process through which working capital can be managed. The processes are
Cash management: It helps to keep the cash necessary for daily to daily business expenses and pay to the suppliers within proper time limit. Also proper cash management helps to avoid holding extra cash unnecessarily.
Inventory management: Holding proper inventory is very important for proper working capital management. Inventory management helps to identify the proper inventory quantity for uninterrupted production and reduce the storage cost of holding extra inventory. Lower inventory level can disrupt production during the supply crisis time. Different methodologies can be used to identify the same.
Payables and Receivables Management: The proper payables and receivables management help to generate cash properly and continue with the normal production process. It also helps to get the money from the debtors properly and pay the suppliers within the credit period time.
Working capital is required to achieve the normal business process and it completely depends on the management’s efficiency to have a proper working capital management process.