Common challenges faced by enterprises in working capital management

Working capital is the difference between a company’s current assets and current liabilities and is indicative of the company’s liquidity position and financial health. Working capital management is vital to ensure that the company has enough liquidity to fund its short-term expenses and ensure all excess cash is invested wisely. However, enterprises face several challenges while managing their working capital.

Let’s take a look at some of the common working capital challenges:

• Lack of real-time information: In a time where we get access to any data at our fingertips, many enterprises still rely on month-end information and paper-based reports for their decision-making. They lack access to real-time data analytics that help evaluate the efficacy of their working capital strategy to make timely improvements.
• Too many stakeholders involved: Working capital management includes the management of inventory, cash, accounts receivables and payables, etc. All these components involve multiple different stakeholders. This makes it harder to implement a new working capital strategy as each stakeholder will have their perspectives and priorities.
• No formal structure: While large organisations typically have a formal structure with designated persons with clear ownership, mid-sized and small organisations lack the resources to do so. This leads to poor accountability, making implementing and managing an effective working capital strategy challenging.
• Changing tax laws: While this wasn’t a constraint in pre-GST times, now, with an input tax credit (ITC) claims bound by a vendor’s compliance, an enterprise’s working capital can take a massive hit when it deals with vendors who do not upload invoices on time. Suboptimal ITC claims lead to a bigger GST cash payout. This directly impacts a business’s working capital.
• Limited visibility: Another reason for inefficiencies in working capital management is the limited visibility of working capital performance at both a strategic and operational level. This could stem from the fact that working capital strategy is not aligned with the overall organisational strategy and has conflicting targets.
  

This article is the second in the series ‘Understanding the facets of working capital management’.

Read next – 5 strategies to effectively manage your working capital.