WORKING

CAPITAL
MANAGEMENT IN
MANUFACTURING
COMPANIES
CORPORATE PERFORMANCE
MANAGEMENT (CPM)
Working capital represents short-term
assets available to a business for
meeting financial obligations such as
payroll, creditors and suppliers. A
company with insufficient working
capital can have liquidity problems
even when their asset position and
profitability is healthy. Manufacturing
companies are subject to working
capital challenges because supplier
and production expenses frequently
require payment several months before
goods are sold to customers
When exploring all industries,
manufacturing is a sector where the
connection between working
capital, returns and investment is
particularly strong.
Manufacturing is generally an
extremely inventory and capital
intensive business, where cash
flow management is especially
important. While this means that
manufacturers can reach
profitability running at high
capacity, they would also have to
balance the cash flow for daily
operations and fixed costs.
 One accounting description of
working capital is expressed as a
financial formula in which net
working capital equals current assets
minus current liabilities. When this
calculation produces a negative
number, a business has negative
working capital and should be alert
for near-term cash flow
problems. Manufacturing financial
managers have several potential
strategies to review for cash flow
improvement.
 Lean Manufacturing
The concept of a lean organization initially
was applied to the manufacturing industry
and has spread to other businesses beyond
traditional manufacturers. Nevertheless, the
benefits of lean manufacturing processes are
helpful for improving liquidity and cash
flow.
A lean manufacturer has an ongoing
goal of reducing waste and unnecessary
costs throughout the manufacturing
process. Fewer financial resources are
required as lean management goals are
achieved, and this translates to improved
working capital. However, reducing
costs might not be enough to maintain
positive cash flow for a manufacturer.
Asset Financing
An ongoing challenge for
manufacturing enterprises is to
alleviate the delayed timing
between spending resources for
producing goods and receiving
payment when those products are
sold. Even when a manufacturer makes a sale,
the customer usually does not pay for
the purchase immediately. Accounts
receivable represent funds which are due
from business customers but are
currently unpaid. Extended payment
terms and slow-paying customers both
translate to a potential cash-flow
shortfall until payments are received.
Asset financing is a financial strategy
that allows manufacturers to receive
funds from their accounts receivable
before payment has been made by
customers. This can be a timely
solution for manufacturing businesses
to consider when they experience
excessive delays in receiving
payments. Costs for asset financing
can vary widely, and a due diligence
review of financial terms is essential.
M R I D U L
A G A R W A L

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