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There is strategy, and there is operational efficiency. Both can make or break a company's financial performance and its returns to investors. A company's success in managing its working capital is one of the more telling indicators of operational efficiency.
Efficient working capital management can improve cash generation, funding capacity and financial structure. When working capital management is weak or deteriorates, all of these may suffer. For some types of companies, such as those in the construction or distribution sectors, working capital is at the heart of the business.
Where management of working capital has been weak or has slipped, improving it can offer great opportunity for enhancing cash generation.
Higher operational Efficiency reduces the requirement of Working Capital so that Profitability is increased.
From a company's point of view, excess working capital means operating inefficiencies. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations.
