Question

Why is it ever so important now for organizations to manage their working capital prudently? Think of a company that is struggling to survive, like a local restaurant, what can it do to improve its working capital situation?

Answer 1

WORKING CAPITAL MANAGEMENT

Working capital is an essential element of business. In order to work efficiently in their day-to-day operations, it is of utmost importance to the organizations to manage their working capital properly. Working capital management has shown a rapid increase and concern among organizations. While earlier, firms used to concentrate more towards their long term investments and liabilities, now there has been a shift in the business running strategies and approach and the area that has seen a paradigm shift is managing the working capital.

Why is managing working capital important?

Working capital is the excess of current Assets over Current liabilties of a firm. It shows how effectively an organization can manage its daily operations and current liabilities with the current assets available. Current assets include cash, short term investments, receivables and inventory, while current liabilities include the accounts payables. Less availability of cash would hamper the liquidity of firm while the firm may lose investment opportunitites if too much cash is kept idle. Similarly, Receivables, Inventory and Payables also play an important role. Infact, all the four components are related to each other through the Cash Conversion Cycle. The cash conversion cycle is the time period taken by a product from sales to realizing the amount in cash. It also involves the inventory, sales and Payables cycle. Therefore, it is vital for any firm to keep a check upon its current assets and liabilties.

Working Capital Management of a local restaurant.

During these times of Covid-19, when all the businesses are struggling to survive, it becomes even more important now for the organizations to manage their operations efficiently. For a local restaurant, it may become difficult to survive since people are avoiding visiting the restaurants due to health and safety concerns. The restaurant may use the following measures to improve its working capital situation:

• The firm may offer discounts to its debtors so they are more likely to pay faster.
• Inventory management is extremely important. The inventory in a restaurant includes all the consumable items. Therefore, inventory must be managed properly.
• The restaurant may also opt for an Online platform so the sales increase leading to more cash generation.