Business Strategies: Working Capital Management
26 March 2021
Financial management can be difficult at the best of times, not least of all when your business finds itself in the position of being unable to meet short-term costs. Managing your working capital can be difficult, particularly if your business has a significant amount of money tied up in assets and property.
Working capital management is a business strategy designed to ensure that a company operates efficiently by monitoring and using its current assets and liabilities to the best effect, it is paramount to ensuring the short and long term financial health of your business.
If you have never heard the term before or have previously tried to employ working capital management strategies with little success, Rodgers Reidy is here to help.
What is working capital management?
The first step to defining working capital management is understanding working capital. Working capital is the difference between a company's current (or liquid) assets, such as cash, accounts receivable and inventories of raw materials and finished goods, and its current liabilities, such as accounts payable and short term borrowings.
Working capital is an excellent measure of a company’s short term financial health and operational capacity as a business. A hallmark of good business management is the ability to utilise working capital management to maintain a solid balance between growth, profitability and liquidity.
Too little working capital and your company risks not being able to meet payment deadlines which can lead to stagnant growth. On the other hand, excessive working capital suggests that there is cash and assets sitting idle that could be better invested in expanding your operations.
Effective working capital management ensures effective use of resources and assists in achieving an appropriate amount of cash flow.
Who can benefit from a working capital management strategy?
Businesses of all shapes and sizes can benefit from employing a working capital management strategy. Whether you operate as a sole trader or are in charge of a national corporation, having adequate cash flow is critical if you are to meet short-term business obligations.
In an ideal world, your business would receive an immediate return on any investment made — whether that be raw material, inventory or personnel. Unfortunately, the real world doesn’t operate like this. In most cases, there is a considerable delay between when you purchase an asset and when you receive any return.
Working capital management can handle this lag. Employing an effective working capital management strategy ensures you have enough cash available to manage short-term costs (including rent, employee salaries, and insurances) while you are waiting to be paid. Consistent levels of working capital enables your business to grow in a steady and sustainable manner.
Rodgers Reidy and Trafalgar Business Advisory — your partners in business
As international insolvency and business advisory firms, Rodgers Reidy and Trafalgar Business Advisory have extensive experience in the area of working capital management. Wherever possible, we aim to return our clients (whether an individual or company) to commercial viability. Effectively managing your working capital can reduce the risk of liquidation or bankruptcy, while also providing opportunities to sustain and expand your operations.
Our established team have experience across all areas of insolvency including turnaround and recovery strategies, corporate and personal insolvency, forensic accounting, and litigation support services.
Whether you are seeking a strategy to stabilise your capital, or require more extensive financial management assistance, contact Rodgers Reidy today.