Working capital is the money available to meet current and short-term obligations. It is necessary to ensure that a business has the cash to meet its daily needs.
Working capital improves with effective working capital management.
Working capital management ensures that a company has enough liquidity by monitoring:
The goals of working capital management include:
The current or working capital ratio measures a company’s capacity to meet short-term obligations. Working capital is calculated by using the formula:
Working capital = current assets – current liabilities
Businesses use key performance ratios to identify areas that need attention, such as:
These help to preserve liquidity and profitability.
Example of working capital calculation:
Assume XYZ Company has $20,00,000 in current assets and $25,00,000 in current liabilities. The Gross Working Capital will be $20,00,000 in this situation. The Company’s NWC would be (-$5,00,000) because its current liabilities exceed its current assets. The company would experience a liquidity crisis due to its negative working capital. This impedes business operations in the long run.
Credit Rating Agencies view a high negative working capital as a negative sign. When the situation does not improve in the future, they reduce the rating by one notch.
The following are the common issues in working capital:
These problems can lead to poor working capital, which can cause cash shortages.
These are the reasons why companies suffer from low working capital:
Inaccurate forecasting leads to the maintenance of large cash buffers. This results in lower business investment or higher borrowing costs. Inaccurate cash forecasts can also negatively impact the forecast team’s internal credibility.
Many businesses run their day-to-day operations manually, such as:
These tasks are time-consuming and error-prone and lead to low cash flow visibility.
Firms don’t have suitable systems to analyze customer payment patterns. Hence, they are unable to track and manage their receivables. This leads to a high DSO and impacts a firm’s reputation.
Manual methods result in ‘dead-on-arrival’ reports. This results in high turnaround time and low bandwidth. This obstructs timely decision-making and prevents teams from focusing on high-value tasks.
Here are some ways to improve working capital:
Here are some key features of HighRadius cash forecasting solution:
The following are the benefits of the HighRadius cash forecasting solution:
A company with a revenue of $765M was facing these roadblocks:
They acquired the following benefits after using the HighRadius solution:
Is your company facing issues with cash flows and finding it difficult to manage working capital? Schedule a demo to learn how your company can enhance its working capital.
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.