Many companies view working capital simply as an expense and not as a source or value. This leads to management reacting to a “cash squeeze” by cutting working capital expenditure without considering the implications for sales, profitability, and growth. To maximize profit in the short term, however, managers tend to invest too much in working capital.
Instead, a value-creating integrated approach should be taken to managing working capital. It considers the entire balance sheet including all assets and liabilities, as well receivables, payables and cash. If you consider all these factors together, it is possible to find opportunities to decrease working capital expenses without negatively impacting sales and profitability.
A company might invest in a more flexible, new machine to decrease inventories. This could reduce inventory costs and increase productivity which can result in a greater profit.
The bottom line is that working capital management shouldn’t be considered a cost. Instead, it should be an integrated approach to creating value. This includes all components of tie-up capital throughout the balance sheets. Companies can use this method to find ways to decrease working capital while increasing their sales and profitability, as well as growing.