Working Capital Cycle (WCC) is the length of time it takes for a company to turn its current liabilities and net current assets into cash. It shows the organization’s effectiveness and capacity for managing its short-term liquidity situation.
Working Capital Cycle= Inventory Days + Receivable Days – Payable Days
The working capital cycle focuses on managing four essential components: cash, receivables, payables, and inventories. To have a well managed and effective working capital cycle, a company must have total control over these four factors. With a shorter working capital cycle, companies can turn stock into profit more rapidly, which is usually better for their finances and operating costs.
Working capital is calculated by using the formula:
Working Capital = Current Assets / Current Liabilities
The three types of net working capital are discussed below:
Here are some problems faced by treasurers in managing working capital:
How can treasurers improve working capital?
Here are some ways in which treasurers can improve working capital:
For instance, if a company sells a fixed asset for cash, it signifies an inflow of cash or an increase in account receivables. That, also without affecting the current liabilities. In this situation, increasing working capital boosts cash flow. Using working capital management solutions helps businesses to make the most use of their current assets and generate enough cash to meet short-term obligations. As a result, companies can:
Implementing AI to capture customer-specific variables, using suitable models for different cash flow categories, capturing external data and seasonality, and analyzing the variance between forecasts and actuals can also improve forecast accuracy. This helps treasury teams transition from manual to strategic tasks like reporting and decision-making. Accurate and timely cash forecasts can bring tremendous benefits, such as:
Apart from these best practices, companies should use treasury management software to manage their working capital.
Here are some features of treasury management software that help in managing working capital:
A global company with a revenue of $765M was facing numerous challenges in managing its working capital:
Using the HighRadius cash forecasting solution, they acquired the following benefits:
Schedule a demo to learn the benefits of HighRadius treasury management software for treasurers.
The HighRadius™ Treasury Management Applications consist of AI-powered Cash Forecasting Cloud and Cash Management Cloud designed to support treasury teams from companies of all sizes and industries. Delivered as SaaS, our solutions seamlessly integrate with multiple systems including ERPs, TMS, accounting systems, and banks using sFTP or API. They help treasuries around the world achieve end-to-end automation in their forecasting and cash management processes to deliver accurate and insightful results with lesser manual effort.