Optimizing Working Capital By Cash Management

Optimizing Working Capital By Cash Management

Importance of Cash:

  •      Cash is the balancing figures between debtors, stock and creditors.
  •        Without adequate cash to meet working capital demands, it is impossible to extend credit, order stock or pay creditors.


Managing Cash or Cash management involved the following:

  •       efficient banking-making sure money received is banked as soon  as possible, making payments the most efficient way, and ensuring any surplus balances are put to interest earning use. Here the liquidity, risk and return of investments must all come into play with the length of time before funds are needed playing an important role.

        The basic in cash flow control is to ensure funds are available when needed.

For the immediate short term trend:

       Weekly or monthly forecasts are prepared for comparison with actual results. If these forecasts indicate unacceptable balances or deficits are likely at some point, it will be necessary to decide how these can be covered. Immediate solutions will include increased borrowing, rescheduling plans and payments, or even sale of an asset.

For the longer term trend:

        Longer term cash flow control will include all aspects of the business including working capital and fixed capital control, capitalisation, trading and dividend policy. For example it may be able to improve cash flow by improvements in operating efficiency or higher sales prices, improved working capital control, or revised fixed asset investment plans.

Cash flow forecasts:

An integral part of the budgeting process.

The objectives of the cash budget are to:

  • integrate trading and capital expenditure budgets with cash plans;
  • anticipate cash surpluses and deficits in time to generate plans to deal with these; and
  • provide a facility for comparison between budget and actual outcomes.

Accountant’s role in Working Capital management:

Accountants have an important part to play in all aspects of working capital management from internal control procedures like invoice authorization through reporting processes (such as production of aged debtors lists and cash flow forecasts).

They use various types of ratio analysis as important indicators of working capital strength which can be applied internally or externally.

Examples of ratio analysis in working capital management are :

Current Ratio:

Which indicates a firm’s short term ability to finance its continued trading. This is a straight comparison of current assets and current liabilities. If the latter should be less than the former, it is worth looking further. However, we need to cautious about the type of trade/business involve and the nature of both current liabilities and current assets.

For example a large element of prepayments in creditors will mean they will not be repaid but will be earned over time. On the other hand, debtors escalating at a faster rate than sales growth could indicate poor credit control and possible bad debt problems.

Generally when it comes to current assets, cash is the most valuable element (it is immediately available to settle bills), and debtors are more value than stock (they are nearer to being turned into cash).

Acid test


Another tougher ratio for working capital management.


Excludes the stock element from current assets. If current assets less the stock element total less than current liabilities the business, on the face of it, may not be able to settle its creditors as they fall due.


Also suggests more finance might be needed, better working capital control will be required, or insolvency may be looming.


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Factors affecting returns risk, liquidity and maturity.


Using cash surpluses to invest in financial instruments.


Projected Cash Flow Statement


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