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Does improvement in working capital cycle mean a better business in all cases?

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Question added by Mohammed Amin Petiwala , CFO , Osool Poultry SAOC
Date Posted: 2016/01/15
Sohail Lone
by Sohail Lone , Assistant Manager Audit , Deloitte - United Arab Emirates

No.The cash flow position means a better business.It shows the overall position of business from different kinds of financial perspectives

Mrinal Deb
by Mrinal Deb , Manager - Finance and Accounts , Comfort Diagnostic & Nursing Home

Not at all. This is the indicator of financial perspective of the business. There are also non financial factor  which also effect the business performance. Besides this improvement in working capital cycle must have to compare with similar business operations. Working capital cycle may vary from business to business based on nature and operations.

It does only mean u can handle ur short term liability effectively 

Muhammad Ahmed Shah
by Muhammad Ahmed Shah , Imports Accountant , DANUBE Co. Ltd. - شركة الدانوب للمواد الغذائية والكماليات

Not in all cases but still it has a major contribution in overall growth of any business. Good management of working capital will generate cash and help improve profits and reduce risks.

If there is an improvement in your working capital cycle, that means you can get money to move faster around the cycle  or reduce the amount of money tied up and the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment.

Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit, you effectively create free finance to help fund future sales.

 

So, this definitely contributes to the betterment of any business substantially.

Vimal Jose
by Vimal Jose , FINANCE MANAGER , BESTER CAPITAL INVESTMENTS

The shorter your working capital cycle, the faster you can convert inventory into cash and thereby lessening your dependency for cash on customer payments and loans.

 

Working capital management is essential for the long‐term success of a business. No business can survive if it cannot meet its day‐to‐day obligations.

 

But overall business success depends on KPI (key performance indicator). KPI is a business metric used to evaluate factors that are crucial to the success of an organization. Working Capital Cycle is only a part of Financial KPI. So we cannot tell improvement in “working capital cycle” means a better business in all cases.

 

Mohamed Yassin
by Mohamed Yassin , Group FP&A , Imdad Group

Not in All cases, Working capital cannot be treated as an absolute figure, Componant analyses should be done, identify the changes.

For example when the cash increase it will show a better working capital whereas it might mean the inefficiency is utilizing the company resources and so on...

Rehan Qureshi
by Rehan Qureshi , Financial Consultant , Self Employeed

precisely my answer is NO. 

Mohammad Iqbal Abubaker
by Mohammad Iqbal Abubaker , Jahaca Pty Ltd - Accounts Administrator , Jahaca Pty Ltd - Accounts Administrator

I agree with the answer given by Vimal Jose   Senior Accountant , Chartered Accountant.

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