Treasury Management: The Practitioner's Guide

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Working Capital Management

When a company requires additional funding, the treasurer usually turns to either debt or an equity issuance. However, if the cost of these traditional funding sources is too high, the treasurer should take a hard look at unlocking cash that is trapped in working capital. While working capital management calls for a considerable amount of tactical work on an ongoing basis, it can be a rewarding exercise if the result is a significant source of cash. The following example shows how much cash can potentially be extracted from a company’s working capital.

The following sections note how working capital tends to vary with changes in corporate sales volume, and then describe the key management aspects of each component of working capital that can impact the level of funds invested in working capital.

WORKING CAPITAL VARIABILITY

Working capital is defined as a company’s current assets minus its current liabilities. While there are a number of minor asset and liability categories that can be included in this definition, the primary components of working capital are cash, accounts receivable, inventory, and accounts payable. All of these components tend to vary in proportion to the level of sales, but not at the same time. For example, if a company experiences high seasonal sales in its fourth quarter, then inventories and accounts payable will likely rise in advance of the prime selling season, while accounts receivable will increase during the fourth ...