WHAT IS WORKING CAPITAL MANAGEMENT?
Gestión, comes from the Latin meaning gestĭo, -ōnis, action of the generic verb that means or means action and effect of managing according to the Royal Spanish Academy, this is very similar to the definition that the Ibero-American Glossary of Management Accounting gives us that management "means administration or organization of elements, activities or people with objectives of organizational efficiency and effectiveness".
Adequate management of working capital requires a previous investment to be made, but this is sometimes interrupted by financing limitations (Valencia Herrera, 2015). On the other hand, Porlles, Quispe & Salas (2013) mention that a correct administration of working capital will depend on the financial forecasts made in the company. These allow to know future economic benefits and also help to take corrective actions.
One of the first essays made on working capital management was prepared by Sagan (1955), his work was done in an empirical way, in this work the author refers that a good management of working capital vitally favors the business
The management of working capital focuses on how the accounts used by companies, whether active or passive, will be managed. Asset accounts have an important role since the higher the value of current assets, the return will not be adequate, if it is too low, there will be liquidity problems, which will represent problems for the company to operate properly. In order to have a good management of working capital, the following accounts must be observed primarily: cash, negotiable securities and investments, accounts receivable and inventories, these accounts must be taken with greater attention since they are accounts that can maintain a recommended level liquidity, the liabilities to be taken into account are: accounts receivable,financial obligations since they are sources of short-term financing.
Some topics that working capital management addresses are:
- Minimum, optimal and maximum cash balances Cash flows Credit policies Collection policies Credit conditions Optimal inventory level
Then the administration of working capital refers to the management of the current accounts of the company that include current assets and liabilities, so that in this way there is the possibility of obtaining favorable results from the economic-financial point of view for the organization. All these decisions ultimately affect the liquidity of the entity, therefore it is of great importance to know all the administration techniques that contribute to its efficient management. (Lorenzo, Solis and Lorenzo, 2010).
Due to the aforementioned, Lorenzo Solis and Lorenzo (2010) mention that:
For this reason, great importance is given to the Administration of Working Capital, since it is one of the most important aspects in all fields of Financial Administration. The magnitude of the same depends on the activity carried out by the company and the position that it is willing to assume in the face of the risk of insolvency; in this way, the greater the amount of working capital the company has, the greater the possibility of paying its debts when they are due, but also the lower return on financing. That is why the magnitude of the working capital that the company must seek must be that which comes from the optimization of inventories, accounts receivable, accounts payable and cash to operate (paragraph 2.)
Thus, the management of working capital aims to manage each of the elements of the organization's current assets and liabilities, but following the bases of the correct administration of these components (Lorenzo, Solís and Lorenzo, 2010).
Then all of the aforementioned is synthesized in that the financial administrator must balance the cash income and expenses so that no inactive balances appear that will not perceive any profit for the business. Due to the fact that it is not possible to accurately predict the cash flows, the financial manager must protect herself by keeping some available balances that allow her to meet her commitments in a timely manner. This circumstance is what leads to the dilemma of optimizing its management. (Lorenzo, Solís and Lorenzo, 2010). And it is there where we find who is in charge of managing labor capital.
In addition to the above, they also mention that the correct management of the company's own resources has a direct impact on the running of the business and represents a significant value in the development of business management. Since its administrator depends to a great extent on whether said business is a success or a catastrophe; therefore, for an entrepreneur control of the resources of his company is an essential element. (Lorenzo, Solís and Lorenzo, 2010). And it is there where we find the vital importance of working capital management, it is the key basis for finding success or error in your organization, the correct management of available resources.
In a few words and very wisely, the administration of working capital refers to nothing more than the fundamental element for the progress of companies, since it measures the level of solvency and ensures a reasonable margin of safety for managers' expectations. and managers to achieve the balance between the degrees of profit and risk that maximize the value of the organization (Lorenzo, Solís and Lorenzo, 2010).
Another of the key functions of the financial manager is that he must ensure that acceptable levels of availability are maintained in proportion to the needs of the company so that in one way or another, anticipate future requirements, since this is the balance sheet item that must be very well used to generate a timely administration and healthy profits for the company (Ámbar y Espinosa, s / a).
In addition to the above, Ámbar and Espinosa (s / a) mention that:
Financial decisions made by company managers positively or negatively affect liquidity and performance (F. Weston and E. Brigham, 1994). From the above, two fundamental issues or objectives of working capital management are to maximize profitability and minimize risk. However, both are directly proportional, which means that when one of the variables increases, so does the other, and vice versa (pp. 18).
In summary, as Ámbar y Espinosa (s / a) mentions, “a financial administrator must seek that particular point of balance between risk and profitability derived from the different decisions of Working Capital, as shown in the Figure. This equilibrium point is called risk-return intercompensation ”. (pp. 20)
Procedure for the analysis of Working Capital
Source: Espinosa, D. Procedure for the analysis of Working Capital. Thesis presented in option to the title of Master in Business Administration: Business Administration. Matanzas, 2005.
Finally, all of the above follows that for a company to achieve long-term success, it must survive in the short term. Therefore, since finances constitute an important and dynamic area which is related to the correct administration of the entity's assets and obligations, it is necessary to point out that to the extent that the administrators and the economic apparatus of economic organizations By learning more about accounting and finance, they will be better able to control their organization and future decisions. (Lorenzo, Solís and Lorenzo, 2010).
WHAT IS THE ORIGIN AND THE NEED TO MANAGE THE WORKING CAPITAL?
As we have already mentioned above, the correct administration of working capital is very important for companies, so that the company can have a better operation and can bear fruit in the short term. Therefore we can say that working capital arose to help companies to have a proper functioning and adequate growth, it also arose based on the need to control exactly what happens within our company regarding the management of each of our assets or liabilities within it.
It has become a tool that we can have to give predictions to the company, predictions that have a direct impact on it and that can be its salvation or its downfall (which in any case would help us find a solution to what happens, in As an example I can say that: “the need for working capital is based on the environment of the company's cash flows that can be predictable, they are also based on the knowledge of the maturity of obligations with third parties and credit conditions with each one, but in reality what is essential and complicated is the prediction of future cash inflows, since assets such as accounts receivable and inventories are items that in the short term are difficult to convert to cash,this shows that the more predictable future cash inflows are, the less the working capital the company needs. ”(Gómez Giovanny, 2001)
This is why we can say that currently working capital has become a necessity for a company, something that our administrative or financial managers have to know from the beginning, since it has reached a degree of importance that the pillar and the bases of growth of the company and in the same way knowing how to manage it can even represent a competitive advantage, since it can be a differential between companies (its correct management)
REFERENCES
- Ámbar A. and Espinosa, D. (s / a) The Management of Working Capital as a process of Operational Financial Management. Retrieved on May 7 from http://www.elcriterio.com/revista/ajoica/contenidos_4/ambar_selpa_y_daisy_espinosa.pdfGarcía Aguilar, J., Galarza Torres, S., & Altamirano Salazar, A. (2017). Importance of efficient management of working capital in SMEs. // Importance of efficient management of working capital in SMEs.. Ciencia Unemi, 10 (23), 30-39. Recovered from http://ojs.unemi.edu.ec/index.php/cienciaunemi/article/view/495/387 Jaramillo Aguirre Sebastián. (2016). Relationship between working capital management and profitability in the chemical distribution industry in Colombia. Abril, 30,2018, from redalyc Website: http://www.redalyc.org/pdf/3235/323547319006.pdfLorenzo, R., Pablos Solís, P. and Lorenzo, R.(2010) The theory of working capital and its techniques. in Contributions to the Economy. Retrieved on May 7, 2018 from: http://www.eumed.net/ce/2010a/Gómez Giovanny. (2001, January 11). The administration of working capital. Recovered from
