Working Capital Management by Keyconsulting UK

If your business receives money late while your suppliers are chasing you to make their payment promptly, you are faced with problems of how to manage your cash effectively. We at, Key Consulting UK, can help you with how to have an effective working capital policy for your business.

The basic trade-off
Any firm must trade off the cost of holding cash against the cost of running out of cash. The cost of holding cash, either as a cash float or in a current account, is merely the opportunity cost of what else could be done with the money. Cash is an idle asset and earns little or no return. If the funds were put to work elsewhere (i.e. invested), they could generate profits.

The costs of running out of cash vary, depending upon the circumstances of the firm. Cash shortages result in the firm not being able to pay its creditors on time, and this could have many implications. Examples include the following:
  • Loss of settlement discounts from trade suppliers
  • Loss of supplier goodwill, e.g. refusal of further credit, higher prices, poor delivery;
  • Poor industrial relations if wage payments are delayed
  • Creditors petitioning for a winding-up of the firm.
Although the above costs may be difficult to quantify the firm must at all times ensure that it has sufficient liquidity, in the form of cash balances or banking facilities, to main­tain its solvency.

Influences on cash balances
There are a number of factors which influence how much a firm would wish to hold in cash:
  • transactions motive - to meet current day-to-day financial obligations, e.g. payroll, thepurchase of raw materials, etc;
  • finance motive - to cover major items such as the repayment of loans and thepurchase of fixed assets;
  • precautionary motive - to give a cushion against unplanned expenditure, rather likebuffer stock;
  • investment motive - to take advantage of market opportunities.
Aims of good cash management
The aims of good cash management are to have the right amount of cash available at the right time. This will, therefore, involve:
  • accurate cash flow budgeting/forecasting so that shortfalls andsurpluses can be anticipated;
  • planning short-term borrowing when necessary;
  • planning investments of surpluses when necessary;
  • cost-efficient cash transmission.

If you require further information in relation to this aspect or any issues covered by this aspect, please contact our office on 020 8768 5628.