Working Capital Management

Working Capital Management

The Importance of Working Capital Management

Effective working capital management is especially important in today’s business environment. The internet allows potential customers to choose to buy products and services from competitors all of over the world. In order to survive, an organization must be able to compete. In order to compete, firms will need to have cash available for growth, advertising and research and development of new products. In order to have cash available, a company needs to manage its working capital.

Managing working capital is a delicate balance. If cash levels are too low a company risks running out of money and not being able to meet its obligations or stay solvent. If cash levels are too high, the company is not utilizing assets efficiently. The failure to effectively utilize assets can cost organizations money in lost opportunity for sales and investment. Additionally, managers who are constantly worried about whether or not bills will be paid on time have little time for innovation.

Organization with Good Working Capital Management

Computer giant Dell is a company that practices good working capital management.

The company's world-class supply-chain management system ensures that DSO stays low. Improvements in inventory turnover increased cash flow, all but eliminating liquidity risk, leaving Dell with more cash on the balance sheet to distribute to shareholders or fund growth plans. (McClure, 2003)

Instead of being bound by ideas that increasing debt, raising equity, cost cutting and restructuring, The top executives at Dell focus on inventory turnover level and reducing the days-sales outstanding. (McClure, 2003)

Organization with Poor Working Capital Management

Many businesses that fail do not fail because of poor marketing, sales or inferior products or services. Some of the failed businesses do not succeed because of