Minimizing working capital is essential for a company in today’s economy. There are many reasons why minimizing working capital is important. With its importance, though, there are many challenges.

The most important reason to minimize working capital is to maximize shareholder wealth. Nicholas Havoutis states, “Proactive working capital management is fundamental to a company’s ability to adapt in a challenging economy, because it’s a discipline firmly within an organization’s control that can be practiced independent of the current macroeconomic environment,” (2003). He goes on to say, “Cash management activities, once seen as managing cash inflows and outflows, are increasingly viewed as fundamental to enhancing shareholder value,” (2003).

Another importance of minimizing working capital is “to ensure that the organization is able to find the difference between short-term assets and short-term liabilities,” (Capital Eyes). When minimizing working capital we are basically managing short-term assets and liabilities. This means cash, receivables, and payables. Successful cash management means increasing cash surplus to cover debt.

There are three ways a company can increase their cash surplus in an effort to cover their debt. First, collect receivables faster. Second, get better credit terms from suppliers. Third, move inventory faster, (Capcut). “Good capital management practices can lead to the optimal management of short-term assets and the efficient use of working capital,” says Havoutis (2003). Melissa Craig appears to agree with Havoutis’ statement by saying that “Each additional dollar of cash permanently eliminated from working capital increases firm value,” (2011). So it is imperative for companies to eliminate large cash, receivables, and inventory balances from the balance sheet.

S. Tully and R. A. Miller