fbpx

The Importance of Working Capital Management

Share on facebook
Share on google
Share on twitter
Share on linkedin
Companies can unlock value when they minimize their cash conversion cycle by collecting receivables faster, carrying less inventory, and extending the time it takes to pay vendors.

morteza-f-shojaei-376893-unsplashManaging your company’s working capital can significantly improve its profitability and cash flow. A key metric of how efficiently a company manages its working capital is the cash conversion cycle; it reflects how long it takes from the time cash is paid to vendors, to the time cash is collected from customers.

Cash Conversion Cycle = Days Inventory + Days Receivable – Days Payable

Companies can unlock value when they minimize their cash conversion cycle by collecting receivables faster, carrying less inventory, and extending the time it takes to pay vendors.

Reducing a company’s cash conversion cycle by efficiently managing working capital not only leads to improved operating cash flow and increased profitability, but also increases a company’s enterprise value.

If you’re not familiar with the term, enterprise value is a figure that theoretically represents the entire cost to an investor to acquire 100 percent of a company. It’s calculated by adding a corporation’s market capitalization, preferred stock, and outstanding debt together and then subtracting the cash and cash equivalents found on the balance sheet.

For a small business, it’s important to note that when large companies decide to make improvements in their working capital, it often comes at the expense of their vendors . . . which could be you. In other words, whenever your customer wants to improve their own cash conversion cycle, they will extend payment terms and shorten inventory lead times which can negatively impact you: their vendor. You need to be aware of this possibility and take precautionary measures.

Regardless of the challenges you face, reducing the amount of time cash is tied up in working capital has proven to be an effective strategy to increase profitability and company value.

Every Tax Return at Brown, Brown Is Prepared in Winter Haven, Florida

Although there is no specific data available regarding the number of returns being prepared overseas, according to the claims by some of the outsourcing firms themselves, the amount is in the millions.

Read More

The 20% Tax Break for Pass Through Entities Just Got Some Clarification

As we’ve written previously, the Tax Cut and Jobs Act contains language that could potentially benefit most of our small to medium sized business clients

Read More

IRS Is Withholding Withholding Form Changes Until the 2020 Tax Year

It will take at least two years for the IRS to figure out how to improve the accuracy of employee withholding.

Read More

Mission Statement vs Vision Statement

Mission and vision statements are often confused with each other but are separate core elements of your company’s strategy.

Read More

Children’s Unearned Income And the Tax Cuts and Jobs Act

The most significant change for our clients this year will be that parents can no longer choose to report a child’s earned income on their own income tax return.

Read More
Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn

Leave a Comment

About Us

Since 1981, we bring measurable results to business owners who want to preserve wealth, boost operating capital, minimize their tax burden, and soar in today’s challenging business environment.

Recent Posts

Sign up for our Newsletter

Scroll to Top
%d bloggers like this: