Working Capital management
Working capital management is the process that ensures the efficient use of a company's working capital, helping the company maintain financial stability. An efficient working capital management process is one of the main aspects of cash flow management and is achieved through effective collection of receivables from customers, optimal inventory turnover, and well-negotiated terms with suppliers. The three most important parts of working capital management involve customers, inventory, and suppliers.
Uncollected receivables from customers represent the company's tied-up financial resources. These receivables can be divided into those that are within the due date and those that are past due. Receivables within the due date, or those whose terms have not yet expired, exist due to the credit conditions we provide to our customers and are an integral part of the sales strategy. Past due receivables, or those whose terms have expired, represent disputed receivables and unplanned interest-free financing for customers. Efficient working capital management involves working on both types of receivables: for the former, it is crucial to identify which customers deserve better credit terms; for the latter, a series of procedures are needed to prevent and resolve disputed receivables.
Like receivables from customers, inventory also represents the company's tied-up financial resources. The challenge of inventory management varies greatly from company to company, depending on the industry. Manufacturing companies are expected to have higher inventory levels than companies providing intellectual services, so the importance of inventory management is highly correlated with the industry and nature of the company's business. Identifying optimal inventory levels, removing dead stock, and creating optimal reorder quantities are some of the key tasks in efficient inventory management.
Suppliers represent the cheapest form of financing for a company. Whether they are suppliers of materials or goods, deferred payment allows the production cycle to begin or goods to be offered without financial outflows for the company. However, it is important to recognize that this form of financing is not entirely free if there is a discount for advance payment to the supplier. A missed financial discount represents the cost of this type of financing. The key tasks for the company in this process are to negotiate better payment terms with suppliers and establish internal procedures that provide additional days for payment. While not paying suppliers promptly may bring short-term financial relief to the company's current accounts, it will lead to a damaged reputation and worse market conditions in the long term.
What does Working Capital Management bring?
It brings a perfectly optimized process of managing working capital. This is an extremely important element of cash flow management, and financial stability is one of the main benefits. The importance of efficient working capital management is even more pronounced in cases of company sales growth and for companies with lower profit margins.
Working capital management provides:
- Optimal amount of money invested in working capital.
- Stable growth without compromising financial stability.
- Reduction of disputed receivables.
- Reduction of dead stock.
- Awareness in choosing financing methods.
- Market reputation.
Problems:
Without good working capital management, companies face a range of problems such as:
- Daily uncertainty regarding the cash available to the company. Accounts are always strained, and every transaction is conditioned by another, which is a common problem stemming from cash flow management.
- A large amount of uncollected receivables, much of which does not come from active and good customers.
- Large quantities of inventory, yet there is always a shortage of raw materials or goods.
- Lost sales due to lack of inventory.
- Poor supplier terms.
- Constant investment of money in working capital.
- The need for external financing of working capital...
The role of AIM Institute
AIM Institute successfully works on establishing effective Working Capital Management (WCM). Whether there is no existing WCM or an existing CFM that you are not satisfied with, AIM provides support in designing a perfectly optimal process using the best global practices.
Implementation segments:
- Employee involvement: Implementation always includes employees. On one hand, it focuses on training and developing the holders of working capital management, while on the other hand, it communicates with all other employees about their role in working capital management.
- Establishing procedures and reports for receivables collection.
- Establishing procedures for defining optimal inventory levels, removing dead stock, creating optimal reorder quantities, and implementing other tools for an efficient inventory management system.
- Establishing procedures for payment of obligations to suppliers.
- Reports and key performance indicators for managing working capital.