Working Capital: An Effective Tool To Judge Your Company’s Efficiency By Sam D'Costa At Isnare.com Ezine Articles

Financial management can be divided into asset management, i.e. investments and liabilities, i.e. sources of financing. It is a common belief that a firm's resource cannot be maximized in the long run unless it survives initial hiccups. It is also common that a firm fails most often because they are unable to meet their working capital needs and as a result, sound working capital management is a basic requisite for firm survival.

What affects Working Capital Management:

Generally organizations are more focused on cash and supply chain issues. On the other hand, external issues like legal environment or internal matters like organizational structure and information system can significantly influence working capital.

Due to market pressure, companies are misled to paying a lot of attention on presenting good quarterly results month after month. Undue focus on this issue may sometimes lead to flattering but inaccurate picture of working capital performance.

Measures to improve Working Capital:

Proper cash flow forecasting is the main issue of effective working capital management. This should take into account the impact of unforeseen events, market cycles, loss of customers and strategies taken by competitors. The effect of unforeseen demands on working capital should be factored in.

There are certain advantages of working capital on a corporate basis. Cash generated at one location can be well used at another. For this to happen effectively, good linkages between production and billing, internal flow of cash and sound treasury practices should be in place.

Executives at the highest levels should rightly set the target and performance levels. This is necessary and will help in identifying and implementing strategies generating short-term cash.

Dispute management system in a company should be effective especially in relation to customers. This is needed in freeing up cash otherwise locked due to disputes. It will also improve customer relation and free up legitimate activities like sales and cash collection.

So, working capital is an important tool to measure a company's operational and financial efficiency. This aspect must be incorporated in the company's strategic and operational thinking. Efforts should always be made to improve company's working capital, which in the long run, would grow into a better customer relationship.

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