Commercial finance glossary
Working capital management
Keeping a business running smoothly requires adequate cash to satisfy both internal costs and the demands of creditors - otherwise known as working capital. Management of your cash-flow involves carefully balancing your short-term assets and your short-term liabilities, making decisions that reflect this relationship.
Areas of working capital management
There are four general areas in which decisions need to be made for a company to be sure it is managing working capital in the most effective way.
Cash - leaving settlement of your creditors' invoices until the last moment means any cash you hold accrues as much interest as possible. Implementing automated 'just-in-time' payment systems is one way of efficiently managing this.
Stock - working out just how much stock you need to hold in order to fulfil orders avoids unnecessarily tying up working capital. Management of your stock levels in this way cuts down on reordering costs and releases much needed cash-flow.
Debtors - identify the credit terms required to attract enough new business to offset the impact of the number you'll be waiting between invoicing and settlement.
Short-term finance - in an ideal world, stock would be financed through the credit terms given by a business's suppliers. In reality, particularly for smaller companies, this isn't possible. Using an appropriate short-term finance option, such as factoring, to bridge the gap will help to maintain a healthy cash-flow.
Good working capital management will ensure sufficient cash-flow is available to both fulfil orders and cover the running costs of the business.
