Why is working capital management important to a company

The positive impact of WCM on key corporate objectives — such as liquidity, profitability and process efficiency — is also confirmed by the participants in the annual WCM study conducted by the Supply Chain Finance Lab at the University of St. All key figures for WCM must be considered in the context of the specific company and the sector it operates in. Company-specific drivers and industry-standard characteristics must always be taken into account when interpreting the figures.

This is a key indicator for evaluating the performance level of individual companies or sectors. The indicator reflects the cash conversion cycle at the company in days between payment to suppliers and inpayment by customers, including all days inventories held.

A high DIH value, for example, usually indicates inefficient inventory management. Gallen indicates that Swiss companies have had a long C2C cycle for years compared with other European countries: they pay their suppliers too promptly and have the highest DIH values on average. It also reveals that a non-linear correlation exists between company performance — approximated using the return on capital employed ROCE value — and the C2C cycle.

This indicates two things:. Managing net working capital is a permanent issue. It needs to be strategically embedded in the entire company. This allows companies to use working capital management as a compass and to set out the desired approach towards customers and suppliers, for example.

As there are always conflicting interests, both within companies and externally, WCM helps with prioritizing tasks and providing strategic direction. Parts of these calculations could require making educated guesses about the future. It can be particularly challenging to make accurate projections if your company is growing rapidly. These projections can help you identify months when you have more money going out than coming in, and when that cash flow gap is widest.

An unsecured, revolving line of credit can be an effective tool for augmenting your working capital. Limitations include higher interest rates , higher fees for cash advances and the ease of running up excessive debt. When you apply for a line of credit, lenders will consider the overall health of your balance sheet, including your working capital ratio, net working capital, annual revenue and other factors. See what banks look for from businesses seeking financing.

Your small business banker can help you better understand your working capital needs and what steps you may need to prepare for any situation. Tips for managing your cash flow. Establishing and maintaining good business credit. When it comes to working capital management, there are three ratios you need to stay on top of things. The first is the working capital ratio , which is calculated by your current assets divided by your current liabilities.

This can be an indicator of financial health and liquidity, particularly in terms of whether or not you can meet all your short-term debt and financial obligations. While the ideal working capital ratio varies heavily by industry, keeping your ratio above 1. The second is your inventory turnover ratio. This is calculated by dividing the cost of goods sold in a set period of time by the average inventory cost of that period.

This ratio measures how efficiently your business is measuring your accounts receivables, and it looks at how many days it takes on average to receive payment after invoicing or transactions.

You want this ratio to be as low as possible because a low collection ratio means much better cash flow for your business. Companies whose customers typically pay promptly and on time will do well here. Look at your industry, your direct competition, and consider what you feel comfortable with. These are:.