Working Capital and Cash Management
What is Working Capital?
Working capital is a common measure of a company’s liquidity, efficiency, and overall financial health. It is the amount of a company’s current assets less the amount of its current liabilities.
Because it includes cash, stock, debtors (accounts receivable), creditors (accounts payable) and other short-term liabilities (typically due within one year), it reflects the results of a company’s day-to-day activities, including debt collection, supplier payments, stock management and debt management.
Why Measure It?
Positive working capital generally indicates that a company is able to pay off its short-term liabilities almost immediately. A negative position generally indicates a company is unable to do so, which could mean it is stretched financially. This might be because it is struggling to maintain or grow sales, is paying bills too quickly, or is collecting amounts due from customers too slowly. Working capital is therefore a good indicator of a company’s operational efficiency.
Why Manage It?
If not managed carefully, businesses can grow themselves out of cash by needing more working capital to fund expansion plans than they can generate in their current state. This usually occurs when a company has used cash to pay for everything, rather than seeking external finance that would smooth out payments and leave cash available for other uses. As a result, working capital shortages cause many businesses to fail, even though they may actually turn a profit. Companies that actively monitor this position can avoid such situations.
How We Can Help
FD Business Solutions can help a business understand the drivers of its working capital, as well as the impact of its plans and future actions on the amount required. We can develop reports that include key performance indicators to highlight movements and areas for improvement. These will enable management to take appropriate steps to maximise the efficiency of the company’s working capital cycle.