what is

what is
Working Capital Management (WCM) is short-term financial planning. It is the set of tactics employed by Treasury to meet an organisation’s cash needs over the upcoming 12 months. Technically speaking, “Working Capital” is defined as a company’s current assets minus its current liabilities. If the value of the assets that can be sold within the next 12 months, i.e. the company’s “current assets”, exceeds the value of the liabilities that are owed within the next 12 months, the company has a working capital surplus. If not, the company has a working capital deficit. In essence, Working Capital Management comes down to a simple question: based on what I own, can I meet my financial obligations over the next 12 months? Obviously, your ability to pay the bills is a measure of your financial stability. Working Capital Management concerns the instruments and measures at your disposal to manage your financial stability.
Paying bills with the cash that you have is cheaper than paying with what you can borrow from the bank, because to borrow money you must pay interest. This is not good for profitability. On the other hand, having too much cash in your current account is, certainly with historically low interest rate levels, also not appealing. The optimal amount of cash varies per company, but either extreme – having no cash or having too much cash – is not optimal. Let’s elaborate.
Often the term “Cash Conversion Cycle” (CCC) is associated with Working Capital Management (WCM). The Cash Conversion Cycle is primarily about the time delay between cash flowing out of the company to pay suppliers and cash flowing into the company from customers. What are the payment terms of your supplier? How long are products in stock? How long does it take to convert raw materials into finished products? How long does a client take to pay? All of these questions can be answered by a variety of specialists: sales, procurement, accounts receivable, et cetera. Increasingly, the corporate treasury department either helps to optimise WCM or is allowed to take the lead.
Regardless of the specialists involved, it is the job of Corporate Treasury to optimise cash flows based on the company’s needs and in light of its overall financial strategy. Corporate Treasury manages the levels of cash in current accounts, arranges short-term funding with banks, and invests excess cash. To accomplish its goals, there are a variety of financial instruments available, and the treasurer’s financial toolkit is still getting bigger. One such tool is known as “factoring”. In factoring, another company pays you for the right to collect money from your customers, who owe you money. In essence, factoring companies buy your invoices, which allows you to receive more quickly the money that you are owed. The factoring company receives a premium and takes over the process of collecting the money. Leasing is another example. Rather than buying the assets that a company needs, it may lease them instead. As a result, the company needs less cash and improves its Working Capital.
Treasurers with a good sense of business can help their colleagues to improve the company’s WCM metrics and the financial health of the company, both on the asset and on the liability side. Sometimes they deploy financial instruments. More often, they help with changes to the fundamental process of Working Capital Management.
Here are some examples:
Working Capital Management is always important for companies, and at certain times it is vital. Cash flow can make or break a company. Without it, you cannot pay the bills, and yet WCM is often difficult to implement. On the one hand, there are many organisational measures and financial instruments that can enable successful WCM. On the other hand, the interdepartmental nature of WCM, and the lack of consistent support for WCM initiatives from company leadership hinders a stable and consistent WCM practice.