Components of Working Capital Management
When it comes to managing working capital, some balance sheet accounts are of greater significance than others. When looking at working capital, it’s common to compare all current assets to current liabilities. However, there are some accounts that are more important to keep an eye on.
1. Cash: Cash flow and cash needs are the most important parts of managing working capital. This means keeping an eye on the company’s cash flow by estimating how much it will need, planning how it will spend and earn, and making sure that the company has sufficient cash to pay its bills. Every account should be looked at because cash is always a present asset. But businesses should be aware of payments that are limited or have time limits.
2. Receivables: Companies need to be aware of their receives in order to handle their capital. In the short run, while they wait for credit sales to be completed, this is very important. This includes overseeing the company’s credit policies, keeping an eye on how much customers pay, and making recovery methods better. It doesn’t matter if a company makes a sale if it can’t get paid for it.
3. Accounts Payable: Companies can use payables as a tool to better handle their working capital because they often have more control over this area. A business may not be able to control some parts of its working capital management, like selling goods or collecting debts. However, it usually has control over how it pays its suppliers, the terms of its credit, and when it spends cash.
4. Inventory: When companies handle their working capital, they first look at their inventory because it may be the riskiest part of the process. When a company wants to turn its goods into cash, it has to go to the market and rely on what customers want. If this can’t be done on time, the company might have to keep short-term resources that can’t be used right away. The company may also be able to quickly sell the stock, but only if the prices are slashed by a lot.