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Strategic working capital management is integral to a company’s survival and it is a concept that many companies fail to grasp correctly. There is a long-standing distinction between assets (whatever puts money into your pocket) and liabilities (whatever removes money from your pocket). The conventional thinking about them is that both of them are predominantly long-term, so they are often projected in long-term periods of three or five years.

However, a business cannot survive unless it can manage some the hurdles associated with building a business. The focus of handling working capital properly is on short-term assets and short-term liabilities that affect daily operations. Short-term assets include working capital, investments, debtors, cash equivalents, inventories, and receivables while short-term liabilities include debts, creditors, and payables. (A handy determinant of a company’s ability to fulfill short-term financial obligations is found by dividing total short-term assets with short-term liabilities. The greater the quotient, the better off the company is; with respect to its ability to finance short-term operations).

Cash Management

The importance of working capital management can be illustrated with this example: A mango shake company requires 0 to buy mangoes, sugar, and other ingredients to keep a well-stocked inventory. In a week, the company packs the mango juice and sells them; in another week, the company receives payment. The 0 is the company’s working capital; which gets converted into the ingredients. Whatever the company owns to process the ingredients (like blending machines, packing machines, etc) are fixed assets, but working capital may be needed to run them (electricity and maintenance).

Effectively managing working capital entails getting the 0 regularly so that they can buy more mangoes and other ingredients to turn to mango juice. If the company can’t sell its mango shake, then it will have no source of working capital to make new batches of mango shake. It may need to borrow money to resume daily operations. Based on this, it is a must to ensure that customers pay on time and that the company pay its suppliers just at the right intervals; not too quickly or slowly.

We have already seen the importance of short-term cash; the question now is how to optimize it for business needs. Forecasting cash flow is one way to do so. Businesses should be alert to everything that can alter its cash flow. Some of these are unforeseen events, loss of customers, business rivals’ actions, and market trends. Going along with forecasting should be a well-placed risk management system, used to weather the effects of drastic cash flow changes to keep all damage to a minimum. Working capital can also be tackled on a company-wide inter-departmental manner. Information sources, banking, production, billing, and treasury should be properly coordinated to ensure that the short-term assets of a business are recycled smoothly and the short-term liabilities are dealt with properly.

Working capital management is also encouraged by cooperating with other parties which serve as your main source of working capital and one of such parties are the customers. Determine what they need so that your production is synchronized with their consumption. Handle disputes well to leave them satisfied. Finally, do all you can to gain their trust; so that they can help fill your working capital needs.

Working Capital Management: How to Keep Your Cash Flow Strong