How to Optimise Your Working Capital Management Strategy

Posted on Nov 02, 2022 at 08:11 PM

Can you imagine running your business's cash and asset obligations without an effective working capital management strategy? It would be a common organisational finance disaster.

Counting on working capital management allows you to control your current cash flow, thus, you would know how to improve all of your business's operating investments effectively.

In this article, we will talk about the working capital management definition, operational components, types of working capital management and the efficient steps to manage your overall business working capital management.

What Is Meant by Working Capital Management?

Working capital management refers to the management of current assets and current liabilities of a business to guarantee short-term cash flow and profitability, while avoiding losing.

When we say, manage working capital, then we are talking about managing the business's current assets and current liabilities in all the working operations to ensure positive business cash liquidity, from the simplest accounting process to double-entry ones.

Moreover, as the working capital is the difference between current cash flow and current liabilities it is the most efficient capital management technique to ensure the business profitability, assets safety, credit balance, and cash liabilities.

Business working capital management is an important part of all companies' treasury balancing, therefore, any company focuses on establishing clear and basic accounting principles for all the short-term operations, strategies, client deals, and company procurement processes.

Essential Components of Working Capital Management:

To ensure well-working capital management performance in any company, then the managing strategy should directly involve these sufficient components and liabilities:

Company Accounts Receivables:

The company is the receivable one, as this includes revenue and cash liquidity, which need to be collected from customers and debtors, and then added to the current company assets.

Company Accounts Payables:

The working capital management cash is related to the essential company payment for supplies, payrolls, and any other short-term costs, as now the company has payable checks and money must be paid to other businesses, employees, and vendors.

Company Inventory:

This component works on the stability of the company inventory and has a big impact on the working capital management success, because any lack of difference requirement may impact the inventory stability reflected on the assets and current financial flow, efficiency of liquidity, and profitability for all firms.

Cash Management:

Cash management in working capital involves efficiently handling a business's current cash flow to maintain a sufficient ratio of liquidity and protect assets and resources of companies while maximising profitability, whether we are talking about real estate accounting reporting and taxation practices or any other business type.

All of that work is done to ensure enough cash flow in day-to-day operations and avoid cash shortages for regular and urgent supply expenses.



Types of Working Capital Management:

Learning about the different approach types of working capital management is vital for any accountant in the accounting sector, whether he/she uses green accounting or any other method to know which type to use based on their business's current assets and current strategic liabilities:

Gross Working Capital Management:

Refers to a company’s total current assets, including primary cash, receivables, and inventory operations to highlight the funds invested in short-term assets to support designed daily operations.

Net Working Capital Management:

This type of working capital management shows the difference between current assets and current liabilities to indicate good liquidity that can cover the firm short-term debts and current daily operations and liabilities in each investment.

Fixed Working Capital Management:

The minimum level of working capital required to maintain the business operations running smoothly throughout the entire year to keep adequate and stable assets and reliabilities regardless of sales fluctuations.

Reserve Working Capital Management:

When talking about reserve working capital management then we are talking about the extra working capital reserved for unexpected needs or critical emergencies as a financial backup to protect assets and liabilities from any aggressive risk.

Variable Working Capital Management:

Each business has its own peak business periods, such as seasonal demands, therefore, accounting specialists should guarantee extra working capital that would be needed to provide continuity and avoid fluctuations in business cycles, these crucial time money flows are usually financed through short-term loans.

Regular Working Capital Management:

The amount needed for the day-to-day functioning of a business, covering routine expenses and current liabilities to guarantee efficiency and smooth operations based on the company objective and innovative requirements.

5 Steps to Improve Your Working Capital Management Strategy:

According to the best accounting for managers course in London, these are the most trusted approaches or techniques if you are planning to save your current business assets value, and maintain a good liquid cash credit:

Analyse Funding Requirements:

As we mentioned earlier, the working capital management strategy involves short-term financial management, thus, you need to determine your business's major current needs, health of funds, liabilities, and deployment processes to attach the working capital management of current assets with actionable growth policy topics.

Organise Your Purchase Process:

You must build a clear vision about your short-time required purchases for all your business liabilities, as this allows you to control your cash flow and assets stability with proven visibility and analysis.

Also, working capital management helps you control your purchasing process based on the corporate current period requirements, decisions, and solutions.

Always Communicate with Your Suppliers:

The working capital management strategy represents the short-time procurement process, thus, efficiently communicating with suppliers will help you keep your products' inventory on the best level to meet current manufacturing requirements.

Evaluate Your Financing Options:

Even though working capital management is basically a short-term capital structure, however, you should evaluate your financing options as choosing the right option at the current time means keeping your assets and cash flow stable in the long-term indicators.

Monitor Your Expenses:

Keeping an eye on your working capital management strategy is required to achieve efficiency, monitor ongoing expenses, and explore better sustainable measures.

This allows you to monitor your financial details closely and know what cost you can reduce or increase in your operation's improvement.

To conclude,

Working capital management strategy is your way to guarantee and support your business's financial safety, and even the ability to grow your assets and financial strategies.  

Thus, to understand the recent practices and modern liquid operational approaches, protect your business resources, and reduce costs you need to attend professional working capital management training.