Cash Flow and Working Capital Management

    • Current Ratio (Good Ratio)
    • Quick Ratio (Acid Test Ratio)
    • Working Capital Ratio
    • Metrics And Management
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Cash flow refers to the net balance of cash or cash equivalent that is being transferred in and out of a company or organisation. It aids in measuring the total performance of the company through its profits and losses. It can be positive or negative. Positive cash flow is when a company has the majority of cash incoming rather than outgoing.

Negative cash flow is when there is more cash outgoing than incoming. Even if you are a start-up or an established business, keeping track of your finances is essential to make good business decisions. Regular tracking and analysis of cash flows allow a business to ensure that its future cash flows are projected accurately.

Working capital and cash flow management is a type of financial method that can help effectively use a company's current assets and optimise its cash flow. Working Capital calculates a business's short-term financial health and liquidity. It also defines a company's ability to utilise its assets efficiently on a daily basis. 

Working capital management is a procedure applied to analyse assets and liabilities to maintain sufficient cash flow to meet short-term obligations. Cash flow and working capital management are two important financial metrics that every business should closely monitor.

 They are essential components of corporate finance for measuring the overall financial health of a business. The concept of working capital can be easily understood through the below statement:

A company's working capital is deducting the current liabilities from the current assets.

Current assets are the raw materials, inventory, cash at hand and bank, account receivable, etc., while the current liabilities include accounts payable, wages, taxes, short-term debt, interest owed, etc. Effective working capital management, therefore, means taking steps to improve the company’s working capital position without triggering adverse consequences elsewhere in its supply chain. 

A business that has a good working capital ratio of assets to liabilities has more probability of overcoming the obstacles of an unforeseen drop in sales to stay in business. The main objective of working capital management is to maximise production efficiency.

Why is the Analysis of Cashflow important?

  • Determining the working capital: Analysis of Cash flow helps to determine the working capital of an organisation. The current assets are the total money available for running operations and completing transactions. Cash flow is calculated by deducting the current assets from the current liabilities. That is represented as the working capital of a company. 
  • Maintaining regular raw materials supply: It is needed to maintain a regular supply of raw materials, which in turn facilitates a smoother production process.
  • Generates elements of expense: It helps in understanding the elements of cost, namely, materials, wages, and expenses. It enables the company to operate its business more efficiently because there is no delay in obtaining materials, etc., because of credit difficulties.  
  • Optimises capital performance: It helps in optimising the efficiency of capital usage, that is, by minimising capital costs or maximising capital returns. Analysis of cash flow can help manage the financial records and ensure that there is always enough money available to pay off expenses and grow the business.
  • Foresees the Financial Credibility: It can help foresee the company's financial credibility. If a company experiences negative cash flow over a long period of time, it could be a sign of possible bankruptcy. Also, if there is a regular positive cash flow, it may suggest the company has the potential for growth.
  • Enables company growth: It enables your company to complete the existing financial obligations and plan for the future, ensuring a smooth day-to-day running of the business. It improves the company's working capital position. It facilitates the expansion programs of the enterprise and helps maintain the operational efficiency of fixed assets.
  • Ensures prompt payments: It ensures that timely payments are made to the suppliers, improving the goodwill and creditworthiness of the business in the market.
  • Maintains the solvency of business: It can help maintain the solvency of a company's business by ensuring an uninterrupted production cycle. A business can be considered to be financially healthy if it steadily brings in more cash than it spends.
  • Helps in investment plans: It can help in making the ideal investment plans for the future and maximise returns on investments for the shareholders. Sometimes, a company may have excess funds. On the evaluation of the working capital, if a company has a high current assets ratio, it implies that it has more funds than its working capital requirements. The company can invest the excess funds to earn short-term profits.
  • Manages liquidity: Every business needs sufficient cash to run its day-to-day activities smoothly. The main advantage of working capital management is that it helps in fulfilling this need. The finance department clearly understands its financial position by evaluating its working capital requirements. They can help easily arrange the funds then and ensure sufficient liquidity and cash flow for daily operations. Otherwise, liquidity issues could impact a company’s brand image.
  • Assists in the decision-making process: Working capital management is crucial for a business as it helps undertake great business decisions. Working capital helps in calculating the daily fund requirements. It helps the company to evaluate its existing financial situation. A company can thus decide on the amount and the source of funds. Utilising a working capital loan means a business can effectively manage to overcome any insufficiency in its working capital requirement to fund its daily workings.

What are the benefits of this service?

  • Increases productivity: An adequate and efficient working capital can increase the productivity of the business by using fixed assets.
  • Proper Financial Management: The finances will be sorted and smooth working by ensuring prompt and timely payments for the suppliers and employees. It helps the companies pay the vendors and suppliers on time and decide when to buy new assets. A company should always make sure that there is sufficient cash and ensure that there is no underutilisation of funds. There must always be a balance between profitability and liquidity. Even for a small business, avoiding extended cash shortages is important.
  • Improves overall efficiency: It improves the business's overall efficiency, resulting in greater market competitiveness and increased working contracts.
  • Strengthens work culture: It encourages the employees to do more work as timely payment motivates them, thus creating a good working environment. 
  • Ensures good credit score: As the bills and standing payments are done on time, it can ensure a good credit score standing in the market. This helps in easily availing business loans with flexible terms and conditions.
  • Overall development: By ensuring financial stability, it helps in taking greater advantage of favourable market conditions by quick response to the increased demand or changing trends in the market. It is essential for a company's continued growth and sustainability.
  • Increases profit: Good management of working capital can aid in generating cash which can improve profits and reduce risks. Cash flow tracks and coordinates the company’s past, present, and future expenses to aid in better profits.
  • Better investments: Most investors these days would never buy a company's stock without looking at its financial statements, which include cash flow. So, regular analysis of the cash flow and working capital can help in getting the best investors and better financial security. At a primary level, a company’s capability to create value for investors is mainly determined by its ability to increase long-term free cash flow and give rise to positive cash flows.
  • Increased business value: Businesses with more efficient working capital management will generate more profits which will result in higher business valuation and enterprise value. Good cash flow management is where a company invests and manages expenses while maintaining its liquidity.
  • Ability to face sales drops and peak demand: Efficient working capital management helps the business to survive through a crisis or increase production in case of an unexpectedly large order.
  • Favourable financing conditions: A company with a good relationship with its trade partners and pays its suppliers on time will benefit from favourable financing terms such as discount payments from its suppliers and banking partners.

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Why Especia?

  • Professional Expertise: Especia has dedicated and highly skilled professionals having expertise in providing integrated legal and financial consultations with an ultimate focus on innovative and distinguished corporate business solutions. We aim to provide secure and world-class quality service to our clients to help them make the best strategies and decisions to conserve their time, money, and property. Our client-centric approach is ideal for all your business needs.
  • Years of Experience: Especia was founded in the year 2010 and had a huge customer base in the US, UK, Canada, Australia, Germany, France, Norway, Switzerland, India, and the Middle East. The 13 years of experience have contributed to the development of several notable organisations. Our great success is only through our employees' hard work and determination.
  • Calculated and Proficient Solutions: The service of cash flow and working capital management requires efficient managing and precise calculations to provide the ideal solution. We analyse all the different methods of cash flow and working capital management and guarantee the perfect approach to each problem. Especia is committed to helping enterprises to be more competitive by becoming more adaptive, innovative, and globally effective.
  • Huge Customer Support: People have trusted our services and delivery of an organised financial plan for years to come. We provide 100% customer satisfaction. Our polite and civil behaviour with patience has contributed to many people entrusting us with their financial troubles. 
  • Professionalism and Ethical Values: Although we are committed to representing our clients strongly, we do so only within our ethical limits and in a manner that goes hand-in-hand with our highest professional ideals.
  • Cost-effective: Our service is cost-effective so as to save your heavy administrative burden. We provide fairly economical services at nominal costs. 
  • Technology-led Strategies: The modern approach we take for calculations and analysis are attained through many researches and studies. We use top-notch and up-to-date technologies and tools to provide accurate results.
  • Easy Access: Our experts are easily reachable online through email and phone. There is also a live-chat session available on our website.
  • Data Security: The information given to us is highly confidential and stays only between the client and our expert. The data is protected through a high-security interface with the latest technologies and operations.

Any individual of a company, business, or organisation can avail of this service. It is a must for even small businesses that aim for larger and greater customer popularity and development.

The service of cash flow and working capital management is the analysis of the financial health of a business. Through the computation of the cash flow and finding out if it is positive or negative, the experienced professionals at Especia help establish an ideal financial plan for the business's current condition. The use of this tool might foresee possible bankruptcy and losses. Also, it can help in better investments and benefit the overall financial stability of the venture. It is an important feature of financial planning.

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