Working capital management of an organization involves managerial accounting aspects and strategy that is modified to evaluate current assets to ensure proper running of an organization (Shin and Soenen, 1998 p.37-39). As it involves managing inventories, cash and accounts receivables. The company can operate efficiently with the ability to fully satisfy upcoming short-term and long-term debts and other necessary expenses. Therefore, I believe working capital management is beneficial in ensuring that modern organizations continue their operations sufficiently.
The purpose of a significant working capital investment in an organization is ensuring balance in getting adequate working capital to maintain its liquidity in meeting current and future economic requirements. It is very important in maintaining the financial health of a firm and its operational success. (Shin and Soenen, 1998 p.30-41).
Maintaining higher liquidity
Modern organizations have a huge amount of liquid cash usually held up in working capital. Thus manager running the firm efficient could get advantage from additional liquidity and have lower dependency ration on external financing (V and Afrifa,2013 p.453-455). Typically, this is more beneficial to smaller organizations because they have access to a limited external funding sources. This, in turn, enables the management to have a proper allocation of resources and improvement of its cash management.
Increased value of the organization
Modern organizations with an efficient working capital management often generate more free liquid cash flows which promote higher business and enterprise value.
The aim of a current business organization is to increase its net profit value after a given end of the financial statement period. Therefore, according to positive research management of account payables and receivables is a great aspect of a firm’s profitability level.
Higher return on capital investment
Shareholders of modern organizations with lower working capital get high returns for every cash invested because it enjoys higher returns on investment.
Improved credit solvency and credit profile
Sufficient working capital management will allow an organization to pay its short-term debts on time. These short-term obligations may be in the form of raw materials, wages, salaries and other miscellaneous expenses that are required for operational activities of the firm. (V and Afrifa,2013 p.460-451).
Ability to counter peak and off-peak demands
A positive working capital management will increase the organization’s survival chances when faced with a financial crisis. It will also help in case of production difficulty during instances of unexpected large order on products.
Advantage over competitors
Modern organizations enjoy high technological advancements. This enables those with a higher supply chain to have large sales volume on products sold at lower discounts. In that case the firm will have a competitive advantage over similar organizations that have inefficient sourcing.
Continuity in production
Efficient working capital management will enable those modern organizations that pay their suppliers on time to benefit from a continuous flow of important raw materials (Padachi 2006, p.45). This ensures production and manufacture of goods to be done uninterrupted therefore being able to deliver their finished goods to customers on a regular basis.
An organization enjoys favorable financial conditions
Modern organizations have a good connection and relationship with both trade partners and customers. It enables the firm to enjoy sufficient financing terms for example discount payments from banking services. materials (Padachi 2006, p.46-47)
It uses ratios such as inventory turnover ratio, collection and capital ratio to know the areas that need to be focused. (V and Afrifa,2013 p.466). A modern organization requires a positive working capital management regarding to reach its goals set at the end of the financial statement period. This will enable it to succeed regarding financial returns.
Shin, H.H. and Soenen, L., 1998. Efficiency of working capital management and corporate profitability. Financial practice and education, 8, pp.37-45.
Deloof, M., 2003. Does working capital management affect profitability of Belgian firms?. Journal of business finance & Accounting, 30(3‐4), pp.573-588.
Preve, L. and Sarria-Allende, V., 2010. Working capital management. Oxford University Press.
V. and Adjapong Afrifa, G., 2013. The importance of working capital management. Journal of Small Business and Enterprise Development, 20(3), pp.453-469.
Scherr, F.C., 1989. Modern working capital management: text and cases. Prentice Hall.
Padachi, K., 2006. Trends in working capital management and its impact on firms’ performance: an analysis of Mauritian small manufacturing firms. International Review of business research papers, 2(2), pp.45-58.