Before we get into the components of working management, we need to first understand what working capital is. Working capital is the liquid money that can be spent by the company. It is the money that is not fixed like the land on which the business is done, the equipment and machines required for the business etc.
Working capital is, therefore, the capital used for paying salaries of employees, conducting the day-to-day operations of the company etc.
Now that you know what working capital is, the four components of working capital are given below.
Cash Management
Cash exists in two forms: near cash and ready cash. Ready cash is the money that is readily available in the form of notes, coins, bank balances etc. Near cash is the cash that is in the form of marketable securities, treasury bills etc. It is the responsibility of the fund manager to maintain adequate cash balances so that the firm’s liquidity remains strong. There are several models of cash management that a fund manager can use to implement cash management effectively like the Baumol Model, Miller-Orr Model, etc.
Receivables Management
Receivable is a term used to describe any amount of money that a person outside the company owes to it. Account receivable refers to the number of debtors owing money to the firm or company. The requirement of working capital is influenced by two main factors: the debt collection policy and the total number of accounts receivable. The credit policy also has a significant impact, but it must be noted that the management of credit policies should make considerably higher profits than the amount required for receivables management.
Inventory Management
Inventory management directly affects the earnings of the shareholders of the company, and hence is a major part of the working capital management. The objectives of effective inventory management is as follows: maintaining the smooth flow of raw materials for production and sales, and minimisation of investment in inventory. The reconciliation of these conflicting objectives is the job of a finance manager, and the level of inventory needs to be calculated accordingly. This analysis is done using stock analysis, ABC analysis etc.
Accounts Payable Management
Payables refer to the creditors and investors in the company and therefore is arguably the most important of all the management of all. Cash management and payable management are very closely related, and so its effective management leads to an enhancement of the company’s reputation as well as a steady supply of materials to a firm.