Working Capital Management – Cash, Inventory and Account Receivables

Introduction

Businesses require adequate capital to succeed in business environment. There are two types of capital required by business; fixed capital and working capital. Businesses require investment in asset, which has to be utilized over a longer period of times. These long-term investments are considered as fixed capital, e.g. plant, machinery, etc.

Another type of finance required is short term in nature. This short term finance or capital is required to undertake day to day operation. Such short capital is called current capital or working capital.

Working capital refers to company’s investment in short term asset such as cash, inventory, short term marketable securities and account receivable.

Information technology is playing a big part in today’s working capital management. Several aspects of working capital management like the cash management, inventory management, account receivables/payable management, etc. are managed through enterprise resource planning modules.

Cash Management System

The cash management module within the working capital management system should be fully integrated with other modules like account receivable/payable, payroll and general ledger. The main features of cash management tools are as follows:

• The module tracks complete audit trails of all transactions and adjustment for controls.
• It highlights current and future balances for all cash accounts.
• The module has the capability for complete drill down to the source of all transactions.
• The module provides full bank reconciliation.
• It allows export of information for analysis, forecasting, presentation, reports, etc.

Inventory Management System

Inventory management and control module is utilized by companies to avoid product overstock and outages. There are several components of an inventory management tool such as order management, asset tracking, product identification, etc. The main purpose within the inventory management system is to reduce the overall costs of carrying. An inventory management tool helps in:

• Sustain a balance between too less and too much inventory.
• Track inventory between locations.
• Track inventory been received at warehouse.
• Track product sales and finished goods inventory.

The main advantage of an inventory management tool is cost savings, increased efficiency, warehouse management, etc.

Account Receivable Management

An account receivable management tool helps solve critical question like when payment is due, how much payment is due, etc. The main features of account receivable tool are as follows:

• Permits transfer of account receivable information for analysis, forecasting, presentation, reports, etc.
• Maintain complete customer information, including sales history, current balance, open deposit, last payment, etc.
• Minimize data entry errors and permit print invoice, credit memos, debit memos, etc.

Appropriate credit policy is essential to maintain the cash flow cycle and return on capital.

Short Term Financing

Another important aspect of working capital management is short term financing. The short term financing tool based on cash flow cycle, inventory position and requirement helps in deciding the quantity of capital required. It also helps identify the term of financing and track payment.

Working capital management decision directly affects day to day business operations. One of the such factors is the cash conversion cycle which immediately affects the liquidity of the organization.