This is challenging within the context of India’s diverse industries and firm sizes. Indian firms face liquidity constraints, dynamic sales growth, and frequent regulatory changes. Management of such complexities in these organizations requires customised strategies. Adoption of advanced tools for forecasting, automation, and data-driven WCM systems can enhance and ensure desired efficiency. In general, these findings expand the understanding of managerial ability and its impact on the working capital dimension of Indian firms. It provides a linkage to the existing theories and makes a theoretical linkage with certain fundamental concepts such as RBV, UET and AT.

Accounts

For instance, an excessive cash, receivables, and inventory may prohibit firms to reach profitable position and lead to opportunity costs (Banos-Caballero et al., 2012;Deloof, 2003;Nazir & Afza, 2009). On the other hand, working capital deficiencies leads to rigidity in the liquidity position and disrupts the day to day activity of the firms (Aktas et al., 2015;Baños-Caballero et al., 2014). Firm value is only possible with the effective management of current assets (CA) and current liabilities (CL) which are elements of working capital (Banos-Caballero et al., 2012). This would ensure steady cash flows, operational effectiveness, and better firm performance. It aligns with the essence of Agency Theory (AT), in such a manner where better WCME alienates the possibility of conflicts among the shareholders and managers.

Similarly, the use of these approaches will depend on the nature and industry of the business. Usually, the business can choose between a conservative, moderate or aggressive approach. Another objective of working capital management is to smoothen the operating cycle of a business. The operating cycle of a business starts from when it initially purchases raw materials and ends when it finally sells the product to customers and receives cash for it. So, the objective of working capital management is to ensure that all processes within the cycle are performed efficiently, and there are no stoppages during it.

It may also include making different policies regarding working capital investment or working capital financing. Similarly, another objective of working capital is to shorten the operating cycle of a business. This may include targeting the accounts receivable, inventories and accounts payable of a business.

Enhancing Financial Efficiency and Profitability

Many businesses discover too late that paper profitability means nothing when suppliers are demanding payment, and your largest customer just requested a 30-day extension. On paper, Net Working Capital represents the difference between current assets and current liabilities. An aggressive approach may have the highest risks for businesses but also come with the highest returns. The risks in this approach are high because the businesses use short-term finance to meet their working capital requirements. Furthermore, the risks are high because businesses depend on timely receipts and payments, which may be very difficult to achieve. Finally, in this approach, no reserves are kept to meet any unexpected situations, which may force businesses into an unfavourable position.

Understanding Working Capital and Company Valuation

• However, there were limitations in these proxies that paved way to the development of more robust method.Demerjian et al. (2012) suggested a reasonable measurement process of MA in their seminal work.
• It calls for a refined roadmap from the relevant stakeholders to encourage managerial talent and define actionable strategies that are conducive for consideration of market uncertainty, rapid growth, and regulatory shifts.
• This section collects any data citations, data availability statements, or supplementary materials included in this article.
• It tells you how much money the company has available to pay employees, suppliers, and other day-to-day business needs.
• With advanced ERP solutions like Deskera ERP, businesses can track real-time cash flow, monitor receivables and payables, and optimize inventory management.
• Through an efficient management of inventory levels, the transportation costs gets reduced and stock outs are avoided.

This is particularly characterised by the Dynamic Capability Theory (Baik et al., 2020;Teece et al., 1997). High MA managers are also expected to manage their short-term fund requirements through internal sources of finance. The Pecking order theory put forwards this concept (Myers & Majluf, 1984), where this helps to lower the cost of capital and prevent sending a negative signal to the market.

Third, MA is measured using a two-step DEA and regression approach per Demerjian et al. (2012), but the paper omits key details about the first-stage regression. The study demonstrates managerial ability has a strong influence on corporate working capital policies. From managerial point of view, it is suggested to adopt strategic approaches in practicing WCME that will enhance firm’s competitive advantage and long-term sustainability.

The overarching goal of working capital is to understand whether a company can cover all of these debts with the short-term assets it already has on hand. Inflation affects raw material costs, wages, and operational expenses, leading to increased working capital requirements. Businesses must adjust pricing strategies and optimize cost management to offset the impact of inflation. Expanding businesses require additional working capital to fund new product lines, increase inventory, hire staff, or enter new markets. Working capital is similar to the funds necessary to maintain a business’s operations with ease. Working capital is the funds required to purchase these necessary items and maintain daily operations without running short on resources.

Still, it’s important to look at the types of assets and liabilities and the company’s industry and business stage to get a more complete picture of its finances. Boeing’s working capital challenges, driven by high inventory and delayed receivables, led to a negative working capital position in 2022–2023. This increased financial risk, lowering its valuation to $120 billion compared to Airbus ($150 billion), which managed working capital more effectively. External factors such as economic recessions, regulatory changes, and supply chain disruptions can impact business cash flow and working capital needs. Companies need contingency plans and flexible financial strategies to navigate uncertainty effectively. Poor inventory management leads to excess stock, increasing storage costs and tying up capital.

📈 Bull Market

• These approaches can reduce Days Sales Outstanding (DSO) by 15-20% while maintaining positive customer relationships.
• Company valuation, on the other hand, determines the economic worth of a business, guiding decisions in investments, mergers, and acquisitions.
• Effective working capital management helps businesses maintain the right inventory levels, optimizing cash usage and minimizing waste.
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• Hence, an understanding of how MA impacts WCM in such settings would offer a valuable insight for the firms.
• The study field is suitable for students with analytical thinking who are interested in the business environment with an emphasis on management.

The needs for working capital vary from industry to industry, and can management working capital even vary among similar companies. A high turnover ratio implies that the company is efficiently managing its assets and liabilities to produce sales, while a lower ratio might signal underutilization of available resources. The critical question isn’t whether your working capital is positive or negative, but whether your capital structure aligns with your business model. A construction company with negative working capital faces imminent peril; a high-volume retailer with the same position might be displaying admirable efficiency.

Michal Prause focuses on investments in renewable energy, specifically on the acquisition and divestiture of solar and wind power projects. In the past, he worked as an analyst at BHM, a consultant at Kearney, and as an economic analyst at the British Embassy in Prague. Following their first year at their home institution, the qualified VSE candidates will now be able to spend their second year at the host institution of ZHAW School of Management and Law as part of the newly landed Double Degree programme. Delivered in English, the Double Master’s degree programme is offered jointly by the Master in Management (MIMG) programme at VSE and Master’s in International Business from the ZHAW in Switzerland.

Automation Software for Large and Midsized Businesses

McCracken Alliance provides comprehensive financial health assessments that identify specific opportunities to strengthen your balance sheet without compromising operations. While executives often fixate on revenue growth and profitability metrics, this fundamental balance sheet calculation quietly determines whether your business can meet its immediate obligations or faces a cash crunch before the next revenue cycle. Businesses develop working capital management strategies that dictate different aspects of working capital. For example, the inventory, accounts receivable, accounts payable management strategies of the business will all be dictated by its working capital management strategy.

ERP solutions like Deskera ERP help businesses automate financial processes, optimize inventory levels, and improve cash flow visibility, reducing overall working capital requirements. Strong working capital management ensures they have enough funds to stock up before peak seasons and sustain operations during slow periods, avoiding cash flow disruptions. Poor inventory management can lead to excess stock, increasing storage costs, or shortages that disrupt operations.

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