Working capital management (WCM) ideally entails close administration of the company's current assets and current liabilities to ensure that the company remains solvent over time. Current assets involve cash, accounts receivables, and the inventory while the current liabilities mainly consist of the account payables. WCM plays a vital role in enabling the company in meeting its short term obligations required for the day to day operations.
Working Capital Management and Assets-Investment Decisions
Working capital management requires an evaluation of various factors which affect cash flows, and this involves assessment of interest rates which are appropriate. Interest rates are mainly charges on funds acquired or borrowed for the acquisition of various assets. Organizations, though close examination of the working capital is able to make informed decisions on whether to invest in a given asset or not. Interest rate commonly applied in WCM is referred to as the cost of capital, which refers to the return rate that capital is expected to generate or earn if a decision is made to invest in a given type of asset. Through WC investment decisions, a company is in a position to purchase equipment necessary for enhancing the production capacity of the firm, Deloof (2003).
Steps in Managing Working Capital More Effectively
Using the above-mentioned examples, working capital management can be managed more effectively through the following steps:
- Assessing the Future Funding Needs Essential for Running the Business: This begins with the evaluation of the short-term funding requirements of the company by looking at the timing in which payments become due. Through cash flow projections the company can analyze and plan for future funding needs.
- Managing the Inventory and Procurement: Prudent management of inventory is key to the success of the working capital cycle as it ensures customers satisfaction by maintaining stock availability at all times. Poor management results in lost sales hence affecting the company.
Timely Payment to Vendors: This can be achieved adequately by the days' payables are outstanding hence developing a good relationship with the suppliers ensuring continued supply to the company.
Management of Debtors Effectively and Enhancing Receivable Process: Debtors management entails reassessing of their contracts and various credit terms to ensure compliance to the company's policy. To improve the process of collection, the company needs to have a strong debt collection team and system in place, Adams & Grass (1972).
Why are these concepts relevant to business leaders in Saudi Arabia and Saudi Vision 2030?
The liquidity of a company is critical in coming up with the ideal capital structure which is an essential element considered by business leaders before making investment decisions. Efficient management of the company's stock of the working capital indicates to what extent the financial fortunes of the firm are likely to be turned around and the going concern. This is key and essential to Saudi Arabia investors and business leaders. With increased investment and liquidity then the Vision 2030 is achievable. Ideally, Saudi Arabia aims atfreeing the country from its dependence on the export of oil. Through efficient working capital management, Saudi Arabia will be able to invest adequately in other sectors that will generate more income and increase the GDP, Nuruzzaman (2018).
Adams, W. V., & Grass, M. (1972). Control of working capital: a programme of management priorities. Gower Press.
Deloof, M. (2003). Does working capital management affect the profitability of Belgian firms?. Journal of business finance & Accounting, 30(34), 573-588.
Mohammed, N. (2018). Saudi Arabia's 'Vision 2030': Will It Save or Sink the Middle East? Retrieved on 6th March 2019 from https://www.researchgate.net/publication/326325880_Saudi_Arabia's_'Vision_2030'_Will_It_Save_Or_Sink_the_Middle_East
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