Managing Working Capital for Financial Health
Is your working capital prepared for what US Inflation has in store?
With talks of there being a recession in the US, business leaders and managers are brainstorming strategies. Implementing such strategies will help optimize their working capital during economic downturns in the country.
Because (let’s accept it, that) inventory sitting in the warehouse (for months) is simply cash locked away inaccessible when you need it most. This guide discusses how businesses can continue to thrive in difficult financial times via proper working capital management (strategies and techniques). Let’s dive in.
What is Working Capital?
Working capital is the money/funds that a company uses to carry out its day-to-day operations. It’s the capital that keeps the business running smoothly on a daily basis. A positive working capital indicates that the company is capable of paying its short-term liabilities.
Unlock Prosperity: Top Reasons Why Effective Working Capital Management is Important
Managing a company’s working capital means to manage its short-term resources. It is an art. It is a science. And it can be challenging. Effective management requires maintaining funds to carry our daily activities and keeping the funds liquid and accessible.
Here are top reasons why businesses should prioritize and invest in the management of working capital:
- Optimized cash flow
Effective management of working capital ensures that you have enough cash on hand to handle day-to-day expenses, pay suppliers and take advantage of any growth opportunity that comes your way.
- Safety net
Anything can go wrong in a business. Having extra cash is always good to handle financial storms with confidence.
- Boosted Profits
Good management of working capital prevents excess cash tied up in non-earning assets and borrowing costs.
- Fuels growth
Effective management of working capital ensures you have resources to fuel growth initiatives for example to launch more products or expand into new markets.
Maintaining a healthy working capital position enhances a company’s creditworthiness. Lenders and investors view strong working capital management as a sign of financial stability, making it easier to secure financing or attract investment.
How To Calculate a Company’s Working Capital?
A company’s working capital is calculated as follows:
Working capital= Current Assets – Current Liabilities
The following are actual figures taken from the statement of financial position 2023 of Walmart Inc:
Total Current Assets: $75655
Total Current Liabilities: $92198
Here’s how to calculate Walmart Inc.’s working capital:
2023= 75655-92198= -$16543
Therefore, working capital for Walmart Inc= ($16543)
The answer is a negative working capital. A negative working capital of $16543 indicates that the company has $16553 worth more current liabilities than current assets.
Is that a cause of alarm?
Well, not necessarily. The negative figure here illustrates that the company, Walmart Inc in this case, could face liquidity issues in the short term and might struggle to meet its obligations without additional financing.
Best Inventory Management Software’s For Scaling Companies
As small companies experience rapid growth the need for a better inventory system arises. Companies usually use MS Excel for inventory tracking. But as companies grow so does their volume of data. Large volumes of data cannot be managed via MS Excel due to its limitation. This is the time when usually companies switch to Power BI or any inventory software.
Here is a checklist that managers can use to check the efficiency of their inventory management software/system:
- Do we have triggers about when we have to reorder the products?
- Does our inventory system give us a clear picture of the inventory for example, the expected time of arrival of products, inventory ordered and the production stage etc.
- Cost of goods calculation is up to date and correct.
- Is there any automated procedure when the inventory reaches the reorder quantity to place new supply orders?
One of the ways to find an effective inventory management system that is suitable for your company is to search for open source inventory management systems on Google. Many systems are built in MS. Excel.
Inventory management software are suitable for use in all types of businesses. The automate inventory procedures and help run operations more efficiently. Forbes recently published a list of the best inventory software 2023.
WA: Stay Liquid, 3X Growth
Is managing your company’s working capital becoming a delicate juggling act?
Is your inventory turnover ratio far from ideal?
Is your capital tied up in unsold goods longer than it should be?
Are you experiencing a wave of stockouts and backorders?
If your answer is yes to any of the above questions then you require professionals to help you revamp current practices for more efficient use of assets and liabilities. This includes planning of collections, disbursements, and balances. Plus, minimizing investments in idle resources, and maximizing the use of forecast data to better identify risk and the optimal use of available funds.
Because it is infuriating to lose potential sales due to inadequate inventory levels. Not to forget the toll it takes on your customer’s trust on your business. Poor working capital management can lead to:
-Lower credit score
-Compliance and legal issues
-Liquidation of assets
-And (God forbid!) potential bankruptcy.
Work Accelerated can help provide you trained inventory professionals to help you achieve optimized inventory levels, and reordering and holding costs. We can help improve your company’s cash management and resolve issues arising from accounts receivables, inventory, payables and supply chain management.
Effective working capital management services are not merely an option but a necessity for businesses aiming to thrive in today’s competitive and dynamic business landscape. These services provide the financial stability, strategic flexibility, and competitive advantages necessary for long-term success. It can be challenging for growing companies to effectively manage their inventory. Managers have to find solutions that prevent over/under stocking of inventory. Plus, there is a limit to the volume of data MS Excel can handle. So when companies grow they should find the inventory software or asset management system that is ideal to meet their requirements. Work Accelerated provides access to a global talent pool of professionals to help companies manage their working capital in a better way and ensure financial stability.