What Is Working Capital Management?
WHAT IS WORKING CAPITAL MANAGEMENT?
Working capital management is actually a process of handling activities and processes which are related to the working capital. This flat of management aids as a check and balances system to make sure that the amount of cash flow into the business is enough to endure the company’s procedures. This is known as a continuing progression that must be calculated using the current level of assets and liabilities. The management of working capital includes handling inventories, accounts receivable and account payable, and cash. Working capital management may also involve implementing short-term decisions that might or might not carry over from one earning period to the following.
The main objectives of working
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It is a consideration of the results of various company activities, including revenue collection, debt management, inventory management and payments to suppliers. In that case, it is important for a firm to conduct working capital management. The importance of working capital management is as follows: Strengthen the Solvency Working capital management aids to run the business in a smooth way without any financial problem in order to make payments for short-term liabilities. Without any delay, we can purchase the raw materials earlier; can do the payment of salary and wages overhead in a rapid time. Satisfactory of working capital helps in maintaining the solvency of the business by giving a continuous flow of production.
Enhance Goodwill Adequate working capital allows a business to be concern on making quick payments and as well as benefits in creating and preserving goodwill. When all the current liabilities and operational expenses are paid on time, the goodwill of the company will be enriched.
Easy to Obtain
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The CCC is mentioned as the Net Operating Cycle. This is because it subtracts the number of days of Account Payables of the company has outstanding from the Cash Conversion Cycle. The reason behind this is that Account Payables are observed as a source of working capital for the company. Besides that, if the cash that needed to be received as the amount stated in Account Receivables will decrease the working capital available to the company to finance operations. The cash conversion cycle is calculated with the formula as shown below:
CCC = Inventory Collection Period + Account Receivable Period – Account Payable Period
The Cash Conversion Cycle has three different parts. The first part of represents the current inventory level and how long it will take for a company to sell this inventory. This stage is calculated by using the Inventory Collection Period (ICP) calculation as follow:
Inventory Collection Period = Inventory/Sales ×360
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