Working Capital Optimization

STRATEGIES FOR WORKING CAPITAL OPTIMIZATION

Working Capital Management is basically a strategy of managerial accounting which focuses on maintenance of an efficient level of working capital and current assets and current liabilities. With the help of the Working Capital Management Company is able to ensure that it has sufficient cash flow in order to meet the short-term debt obligations and operating expenses.

To optimize the balance between assets and liabilities, working Capital Optimization is done.  It generally focuses on optimizing the ratio of cash-in-hand (liquid assets) as other assets are not generally disposed of on regular basis.

To measure the company’s liquidity Working capital is very important.  Working capital can be managed from the following:

  • Accounts receivables;
  • Accounts payable and
  • Inventory levels.

Cash cannot be used for investments in working capital. Therefore there will be a need for outside financing through public offerings, asset sales, or by debt financing.

For the upcoming opportunities in the current economic scenario, cash availability must be ensured in the organization through working capital optimization.

For working capital, procurement function is highly influential through its involvement in accounts payable and in inventory management.

For working capital optimization, following below mentioned procurements directly impact to results:

  • Optimization and setting of working capital targets
  • Alignment of the procurement cycles with supply and demand

Working Capital Optimization is done through optimizing receivable collection, inventory cycles, and payment terms. We can say that faster collection of receivables, reduction of inventory cycles, and the extension of payment terms.

Supply chain cost will rise if optimization is not done by these ways correctly. Customer service cost will increase in case you pressurize customers to pay the amount which they can’t afford and then the customer has to borrow.

Overall cost acquisition will reduce in the long run if inventory turn-over will be reduced aggressively by you. In case payment terms are extended beyond the affordability of supplier then risk cost can be increased as suppliers will have to borrow at high financing rates and cost burden will get shifted on you and there will also be a risk of their financial solvency.

What are the factors affecting working capital?

Following factors affect the working capital:

Working Capital Optimization

How to process for optimization?

Here are the following ways:

  • Collection of Receivables

Slow customers should be followed but the main focus should be on those who have the ability to pay first. In case of public companies, financials should figure out which are publically available to get to know their financial position whereas, in case of private companies, credit rating data can be used to get to know how cash-rich they are?

  • Inventory Cycles

The comparison should be done between optimize inventory costs and logistics costs and potential loss from stock-outs.  Optimal inventory cycle should be determined for each commodity.

  • Extension of Payment Terms

For the extension of the payment terms, first get to know about those suppliers who can afford payment extensions and who would not suffer negative impact.