What Exactly is Working Capital?
Working Capital is total current assets minus total current liabilities. The excess is your liquidity cushion. Almost all current assets (primarily inventory, accounts receivable, etc.) are funded by a company’s current liabilities, primarily accounts payable. Certain current assets may not be able to be converted to cash at the time the cash is needed to meet short-term obligations. Some companies are forced to hold cash on hand so bills may be paid timely or terms are extended on their supplier invoices so the cash used to pay the bills are used for other needs, thus causing strain on the cash-strapped supplier relationship.
The Goal of any Company is to Manage its Cash Flow and Improve its Operating Efficiency.
To effectively determine the amount of working capital required for each operating cycle is paramount to running a business efficiently. When a company maintains a low level of working capital, it can actually improve its operating efficiency and cash management. The problem develops when a company has too much cash tied up idly in working capital allocated for its short-term obligations.
Today’s Solution is to Implement a Supply Chain Finance Program.
An SCF program offers several benefits to credit quality companies who seek to optimize its operating efficiency. An SCF funder, i.e., FSW Trade Finance QuickPay, will provide cash flow to the company to pay its suppliers’ invoices upfront and allow the company to pay 60-90 days later. This early payment mutually benefits the suppliers who no longer have to wait to be paid and the company who can now use the cash for other obligations, effectively improving its operating cash flow cycle.
Working capital is vital to ensure uninterrupted operations but too much cash flow on the sidelines results in inefficiency and lower returns. Supply Chain Finance programs are the solution to making more funds available for other needs and benefiting all parties.