The Upside of Optimizing Working Capital

by Aug 21, 2019Factoring, Supply Chain Finance

What Precisely is Working Capital?

Working Capital is defined as total current assets minus total current liabilities. The excess of this equation is your liquidity cushion. Almost all current assets are funded by a company’s current liabilities, primarily accounts payable. Some current assets may not be able to be converted to cash at the time the cash is needed to meet short-term committments. Some companies are forced to hold cash on hand so bills may be paid or terms are extended on their supplier invoices so the cash used to pay the bills may be used for other needs. This can cause strain on the cash-strapped supplier relationship.

The Goal of any Company should be to Manage its Cash Flow and Improve its Operating Efficiency.

To effectively determine the amount of working capital required for each operating cycle is key to running a business efficiently. When companies maintain low levels of working capital, they can actually improve their operating efficiency and cash management. Issues develop when a company has too much cash tied up idly in working capital allocated for its short-term obligations.

Implementing a Supply Chain Finance Program is Today’s Solution.

An SCF program offers many benefits to credit quality companies who seek to optimize their operating efficiency. An SCF funder, like FTF Financial Group, provides cash flow to companies to pay their suppliers’ invoices upfront and allow the themsleves to pay 60-90 days later. Early payment benefits the suppliers who no longer have to wait to be paid, and the company who can now use the cash for other obligations, improving its operating cash flow cycle.

Working capital is vital to ensure uninterrupted operations, but too much cash flow sitting idly on the sidelines results in inefficiency and lower returns. Supply Chain Finance programs are today’s solution to making more funds available for other needs and benefiting all parties.