Working capital is the combination of both short-term assets and short-term liabilities of the firm. Working capital management involves the decisions that are made relating to a firm short term asset and liabilities with the goal of ensuring that the firm has sufficient cash flow that maintains its operations (Barine, 2012. This paper pays high attention to the summary of effective techniques of managing working capital of a firm.
The first technique involves adopting and implementing policies that enhance the management of current assets, debtors, inventories and short-term financing. For example, identifying cash balance that enables the firm to meet routine expenses and at the same time minimizing cash holding costs. Debtors’ management involves taking care of the amounts owing to the firm (Barine, 2012). Every business needs to know who owes it the money, how much is owed, for how long it has been owed and for what reason it has owed. Faster collection of money from these debtors increases the cash flow of any business (Flanagan, 2005). A similar policy involves reducing the financing costs of a given by minimizing the amounts of investments using current assets.
Another technique of managing working capital is through the use of financial ratios. These ratios analyses the components of working capital through expressing the relative effectiveness of managing inventories and receivables. The ratios also help in detecting signs of value deterioration. Examples of these ratios include debtors to creditor sales ratio, liquidity ratios and working capital ratio, stock turnover ratio among others. Once these ratios are established, it is possible to evaluate them at any time and to relate them with other comparable businesses (Filbeck & Krueger 2005).
It is, therefore, evident that the major techniques of managing working capital include implementing policies that enhance working capital and through the use of financial ratios.
Barine, M., N., (2012). Working capital management efficiency and corporate profitability: Evidences from quoted firms in Nigeria. International Scientific Press. Journal of Applied Finance & Banking, vol.2, no.2, 2012, 215-237.
Filbeck G and Krueger T (2005), “Industry Related Differences in Working Capital Management”, Mid-American Journal of Business, Vol. 20, No. 2, pp. 11-18.
Flanagan, B., (2005). Managing Working Capital. Business Credit; Abi/Inform Global.