Managing Working Capital

Managing Working Capital

When working capital is positive, current assets (CA) are greater than current liabilities (CL). This indicates that a business has enough short-term assets to cover its short-term obligations. Conversely, when working capital is negative, current liabilities exceed current assets. This suggests the business may face difficulties in meeting its short-term liabilities with its available assets.

Options available to companies based on their Working Capital

When Working Capital is positive:

• Optimise inventory levels: Ensure inventory matches demand to prevent overstocking and free up cash. Implement inventory management systems to maintain optimal stock levels.
• Invest excess cash: Use surplus funds for short-term investments that provide liquidity while generating returns. Avoid investing excess cash in low-yield or non-essential expenditures.

When Working Capital is negative:

• Reduce inventory: Reduce inventory to release cash and minimise carrying costs. Adopt just-in-time practices to keep stock levels aligned with immediate needs.
• Explore Financing options: Explore short-term financing solutions such as overdrafts or working capital loans to bridge gaps. Consider alternative funding sources if traditional options are not available.