Article by Meenakshi Shivram

At month-end, individuals may experience financial strain, a sentiment echoed in the business world while managing the delicate balance of inventory, receivables, payables, and taxes – collectively coined as Working Capital.

In essence, working capital is the capital needed by a business to run its day-to-day operations, and is a function of its current liabilities and current assets.

Working Capital = Current Assets – Current Liabilities

Working capital management involves adeptly managing the three key interdependent components:

1. Procurement & Payables
2. Sales & Receivables
3. Inventory

 It involves a comprehensive set of measures integrated across various operational processes to result in efficient cash release & management. This helps in improving the financial health of the business. 

Benefits of Working Capital Optimisation 

• Cash Release

Unlocks additional cash, that can ease liquidity for the business

• Enhanced Planning

Stabilises timing & predictability of cash flows, enhancing predictability for more accurate planning

• Cost Savings

Reduce long-term borrowing requirements, saving financing costs

• Increased Adaptability

Provides a buffer and therefore some flexibility against volatility 

• Stakeholder Preference

Creditors & Investors favour companies with strong working capital positions

• Higher Returns

Efficient use of working capital can result in higher return on assets

Failure to manage working capital properly can result in severe consequences, including increased debt, and sometimes even business failure. Unfortunately, several businesses are unable to devote attention to this critical issue due to a lack of resources, time or knowledge. 

Role of technology to facilitate working capital optimization 

In the era of technology, businesses can experience unprecedented levels of efficiency and affordability in managing their working capital

• Automation of Processes

Several crucial, yet time-consuming processes, such as invoicing, payment & reconciliation can now be automated resulting in increased cash conversions.

• Cash Flow Forecasting tools

Using dynamic cash flow forecasting & modelling, businesses can prepare for multiple scenarios and anticipate their cash requirements. They can make operational decisions and adapt their resources accordingly.

• Reporting & Dashboards

Analytics can help detect patterns and trends in past data, that can be used as actionable insights for decisions regarding payables, receivables and inventory.

• Supply Chain Management

Through active supply chain management, businesses can realt-ime visibility into actions across their entire chain that can help in optimising inventory management

• Relationship Management

Using vendor & customer relationship management tools, businesses can track & follow up on their collections and payment status. This can improve not only the cash flows, but also the relationships between the stakeholders.

Embracing technology can help businesses streamline working capital management and propel it towards financial efficiency and success.