Working Capital Management

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The term working capital tells us about the quantum of fund required to maintain day-to-day expenditure on operational activities of a business enterprise.

1. Working Capital can be termed as lifeblood of a business, while its improper usage can lead not only to loss of profits but also lead to the ultimate down fall of a concern.

2. The Working capital management if used effectively and consistently, will assure the health of an organization good or can never be short of funds.

Concept of Working Capital Management

For the better understanding of Working Capital, it is necessary to understand the various concepts of Working Capital. The main concepts of Working Capital are as follows:

Working Capital Management

The need of Working Capital:

The need for working capital appear due to time gap between production and recognition of cash from sales. Thus the working capital is needed for the following purposes:

1. To purchase raw material, components & spares.

2. To pay wages and salaries.

3. To incur day to day expenses and overhead costs such as fuel, power and office expenses, etc.

Sources of working Capital:

A firm can arrange working capital from the following two sources:

Working Capital Management

Global Working Capital Analysis:

1. The performance has been verified of working capital performance of 17 sectors from healthcare to retail and automotive to technology out of it two sectors (industrial manufacturing and aerospace, defense and security) have some of the highest capital requirements across industries in 2015. The energy and utilities sector deteriorated the most in 2015. The 10 year average gives a working capital performance of 21 days from 2005 to 2015.

2. Globally the working capital has been wasted by €300billion. The last two years have seen strict control on working capital as determine by the improvements in 2014 and 2015 of 0.3% and 1.6% appropriately.

3. The percentage is approximately 22% more working capital consumption for non-investment grade companies.

4. The Cash on-hand has significantly exceeded as a percentage of revenue, moving from 8.6% in 2006 to 11.6% in 2015, over the same period, working capital has changed marginally, having been 11.6% in 2006 and 11.9% in 2015.

5. The sectors which has the highest working capital performance spread (when comparing the 25th percentile against the 75th performance in the sector) are aerospace, defense & security, engineering & construction and retail.

6. In regard to Day sales outstanding engineering & construction is by far the sector with the largest spread between top and bottom performers, i.e. 76 days, the communications sector has by far the largest weighted average DPO (Days payable outstanding).

7. Over the last decade, E7 nations’ working capital cycle have increased from 40 days in 2006 to 44 days in 2015 by 11%, whilst the G7 nations’ performance has remained stable. Germany and the USA are the most stable regions in our review, with an average performance of 48 days and 34 days respectively.

8. On an average, mid-size enterprises have more than double the working capital ratio of large corporations, with mid-sized companies’ working capital performance stays in between.

Cash Conversion Cycle:

The cash conversion cycle (CCC, or Operating Cycle) is the length of time between a firm’s purchase of inventory and the receipt of cash from accounts receivable and paying it to creditors. It is the time required for a business to turn purchases into cash earnings from client.

Working Capital Management


“Global network of dedicated working capital professionals helps clients to identify, evaluate and prioritize actionable improvements to liberate significant cash from WC through sustainable changes to commercial and operational policies, processes, metrics and procedure adherence.”



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