1484Finance and Accountancy Briefings

Finance and Accountancy Briefing

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A fine balance - optimising working capital trade-offs

Overview

Now that the economy seems to be moving again, its natural, to worry less about working capital – natural, but not recommended. In fact, a recovery can be almost as dangerous for a business as a downturn. Move too slowly and you may lose out on important opportunities. Moving too quickly and you may build up too much inventory and run out of cash.

Striking the right balance is not easy. A lot comes down to how well managers can answer some difficult questions, not only about inventory, but about customer credit risk and suppliers terms.

Making the task still more difficult, like so much in business, most of these answers don’t have a yes- or no answer. For the most part, they’re trade-offs, with no single right answer, just better or worse answers for a particular business at a particular point in time – in the same way that first gear is a good for a mountain pass but a bad gear for the expressway. A company that three years ago thought exclusively about making trade-offs that reduce operating costs may now be thinking more about making trade-offs in a way that improves its reputation for customer services. But whether the company wants to maximise its costs, boost its service levels or reduce its risk, it can’t avoid setting priorities.

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