This is a crucial area to the survival of your business. The goal of working capital management is to shield your organisation from considerable cash flow problems and facilitate improvements in business performance.

The management of working capital requires managing cash, accounts receivable, accounts payable and inventory.

Working Capital Management – Cash Management

Effective cash management ensures various benefits to your organisation, for example ensuring that your organisation has adequate funds for growth and for unforeseen investment opportunities.

Accounts Receivable Management

If your company provides credit to your customers, you need to have a collection policy in place and monitor your receivables by generating an aging schedule.

The aging schedule assists you in finding out if your customers are paying their bills according to the company’s credit terms.

Changes are required, such as re-evaluate your credit and collection policies, if a significant percentage of your customers are delinquent with their payments.

Accounts payable management

Two major ways that accounts payable influences your company’s profitability are:

  • Your company’s relationship with your suppliers

It is essential that your business maintains strong relationships with your suppliers. This will enable: good deals, new and better products offered by suppliers.

  • Your company’s cash flow

Taking advantage of discounts if paying your bills within a certain number of days (provided your business has enough cash flow) can have a positive effect on profitability.

Poor management of payables can cause disruption to your business if suppliers withhold supply until payment is received and eventually ends in cancellation of credit.

Inventory management

There are two major tasks of inventory management:

  • Controlling inventory – continuously recording the inflow and outflow of inventory combined with either continuous cycle counting of stock or period stock takes
  • Managing the costs – acquisition costs, storage costs and opportunity costs (for example because of stopped production or lost sales)

One way to avoid opportunity costs is to hold extensive quantity of inventory. But this, in turn, will cause undesirable build-up of inventories which leads to decreased efficiency, increase in overall cost and, strenuous cash management

The economic order quantity (EOQ) model assists to calculate the order quantity that minimises total costs. The EQO formula is:


EQO = (2AB/C)0.5


A = fixed cost per order, setup cost (not per unit, usually cost of ordering and shipping and handling. This is not the cost of goods)

B = demand quantity over a period

C= holding cost per unit, also known as carrying cost or storage cost (capital cost, warehouse space, refrigeration, insurance, etc)

Let’s consider a simple example. Suppose your organisation purchases 4000 ski jackets per year; the cost of processing each order is $20; carrying costs are $4 per ski jacket. Therefore: A = 20; B = 4000; C = 5


EQO = (2 x 20 x 4000) / 4)0.5 = 200

This shows that the order quantity that minimises costs is 200 ski jackets. In this situation, the ideal number of orders per year is 4000 / 200 = 20 orders

© Fitzpatrick Group 2017

Gabriela Timar – Bookkeeper

Gabriela is a highly organized and detail-focused bookkeeper with more than eleven years of accurately and efficiently supporting overall accounting activities.


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