Managing Working Capital

Working capital management refers to the activities that comprise a business strategy aimed at effective management of the short-term assets and liabilities of the business that ensures resource availability for day-to-day operations and balance the efficiency of cash generating assets and the relationships with suppliers. The components of working capital are cash, inventory, trade receivables (current assets) and the trade payables, short-term debt, and accrued expenses (current liabilities) of a business. Specifically, working capital refers to the excess of current assets over current liabilities, and is considered as a measure of a company’s liquidity and its ability to manage its daily cash needs. Working capital management generally entails the careful management of cash and receivables as well as close relationships with suppliers to negotiate comfortable credit terms.

Trade Receivables

Trade receivables, also known as debts, of a company are created through a credit sale and results in a customer owing the company money for goods already received or services already performed. Trade receivables are a current asset to the company but represents cash that cannot be used for other purposes. A large proportion of cash tied up in trade receivables may reflect poorly on the organisations credit control departments and deprive them of funds during a cash crisis. In the event of an emergency where immediate encashment of trade receivables is required, a debt collection service such as commercial debt collection Brisbane, debt factoring agencies or similar services may be used. This allows companies to recover their money, albeit, at a cost without diverting attention from the main functions of the business. Offering early settlement discounts is an alternative and potentially cheaper method of recovering debts early.


Cash is the most liquid asset and holds an important position in any business’s asset balance as the most versatile asset, being convertible to any other form almost instantly. Cash is also needed by the company at the end of a business cycle to pay off their debt. However, excess cash on hand is essentially wasted cash as it could be earning an interest or invested into the business. Therefore, businesses must strike a balance between having enough cash to cover their liabilities but not having so much cash that the opportunity cost is too high.

Trade Payables

Trade payables refer to money the organisation should pay in the future relating to products or services already received. The creditors of the organisation would have arranged credit terms with the business and expect timely payments of their invoices. However, trade payables are essentially free finance as the cash can be used for other purposes and invested until the invoices are due. However, the risk of doing this is that it may delay payments to suppliers who may view this as reason to discontinue business or impose more restrictive credit terms. It is also unethical to delay payments to businesses longer than necessary and beyond agreement.

Working capital management is an important aspect of the daily operations of any business and effective management allows a business to deploy and allocate resources as deemed most effective.

Written by