Essay on Minimizing Working Capital

Words: 2072
Pages: 9

Minimizing working capital is essential for a company in today’s economy. There are many reasons why minimizing working capital is important. With its importance, though, there are many challenges.

The most important reason to minimize working capital is to maximize shareholder wealth. Nicholas Havoutis states, “Proactive working capital management is fundamental to a company’s ability to adapt in a challenging economy, because it’s a discipline firmly within an organization’s control that can be practiced independent of the current macroeconomic environment,” (2003). He goes on to say, “Cash management activities, once seen as managing cash inflows and outflows, are increasingly viewed as fundamental to enhancing shareholder
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Moving inventory faster can give businesses a step up from their competition by getting products to their customers faster. Tully and Miller back that statement up by declaring “cutting working capital forces companies to produce and deliver faster than the competition, enabling them to win new business and charge premium prices for filling rush orders.

As all good things do, minimizing working capital has its challenges. It is definitely not an easy, clean cut, one-size-fits-all process. Like Havoutis pointed out; it is a delicate process of balancing cash, receivables, inventories, and payables.

One vital element in minimizing working capital is trade credit. Firms extend trade credit to their customers through receivables and receive trade credit from their suppliers. Finding the right balance in trade credit can be tricky. The goal is to reduce the credit terms of customers while at the same time extending credit terms with suppliers (Deloitte). The problem with this is that companies run the risk of losing business by reducing credit terms as well as losing needed credit lines with their suppliers. What businesses can do to ease this challenge is to focus on customer specific payment performance when determining credit terms and maintain timely and accurate invoicing. Timely and accurate