Working capital management: difficult, but rewarding

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Author: Andrew Harris
Date: May 2005
From: Financial Executive(Vol. 21, Issue 4)
Publisher: Financial Executives International
Document Type: Article
Length: 1,206 words
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From the perspective of the chief financial officer, the concept of working capital management is relatively straightforward: to ensure that the organization is able to fund the difference between short-term assets and short-term liabilities. In practice, though, working capital management has become the Achilles' heel of scores of finance organizations, with many CFOs struggling to identify core working capital drivers and the appropriate level of working capital.

As a result, companies can be limited in their ability to weather unforeseen or adverse events and ensure that cash is readily available where it is needed, regardless of the circumstances. By understanding the role and drivers of working capital management and taking steps to reach the "right" levels of working capital, companies can minimize risk, effectively prepare for uncertainty and improve overall performance.

Theory vs. Practice

For most CFOs, the greatest challenge with respect to working capital management is the need to understand and influence factors that are out of their direct control, in order to obtain a complete picture of the company's needs. The CFO's span of control can be limited in terms of functional silos, though corporate finance may well have some powers of influence over operating units.

While organizations generally concentrate on the right processes, such as cash, payables and their supply chain, they are less likely to take into account various internal and external constraints that can dictate how effectively those processes are executed. For example, the legal and business environments can have a significant impact on performance. Similarly, internal considerations--such as organizational structure, shared systems, autonomous business units, multinational operations and even information technology--can impact working capital, creating barriers that can hinder a CFO's ability to truly understand, and therefore manage, the company's needs.

The human factor is another important consideration. If management is focused purely on top-line...

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Source Citation

Source Citation
Harris, Andrew. "Working capital management: difficult, but rewarding." Financial Executive, vol. 21, no. 4, May 2005, p. 52+. Accessed 2 July 2020.
  

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