Managing Working Capital
Working capital is a company's most valuable asset, and consists of current assets--including cash or any other assets that can be converted to cash within 12 months. Effective management of working capital has many positive advantages, including earning a company interest on its investments, producing a practical annual budget and planning for the future. Management of working capital can also be used to measure a company's financial performance. Unfortunately, when working capital is poorly managed, a business may experience cash shortages, be unable to pay its creditors or even fail. But there are steps a company can take to improve its economic position.
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Instructions
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Recognize from the start that investment and financing decisions go hand in hand. The amount of capital a company has available to invest will determine how much risk can be taken. Despite the potential for higher profitability that could be gained from higher-risk investments, if resources are limited, it might not be a practical decision to invest a lot of money in higher-risk funds.
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Determine goals for growth. Be sure to include plans for investment, as well as for additional financing should the need arise. Review past annual financial records to help predict future cash surpluses or shortages, so plans can be made well in advance.
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Work toward improvement. Establish a realistic budget, then monitor cash flow on a regular basis. Working capital should be measured daily, weekly and monthly. Compare actual performance with the projected budget. If you keep a close eye on the cash coming in and going out, you may be able to anticipate problems and work toward a solution before the situation becomes too serious.
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Talk to your creditors when business is slow. For example, vendors supplying to restaurant and hotel owners are often willing to delay some payments until the busier months of the tourist season. Contact creditors early on to work out a payment schedule.
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Involve key personnel in any strategic planning. Effective communication is an essential factor in any plan for success. Before staff can support a strategy, those involved must first clearly understand how that strategy is expected to work.
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Compare your company's performance with that of similar organizations. Many businesses have been able to improve their financial performance by learning from others. Benchmarking requires research and analyzing the data collected, but allows for appropriate action to be taken.
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Tips & Warnings
Many companies are now choosing more short-term investments in an effort to have additional cash and other liquid investments readily available as a financial safety net.
