Working capital management as a financial strategy for business development

Abstract

The objective of this article is to analyze the management of working capital as a financial strategy for business development, based on a literature review on the theory of working capital. The purpose of working capital is to ensure that companies have an adequate cash flow to perform regular operations and thus reduce the possibility of not being able to meet liabilities or short-term obligations. In that sense, working capital helps maintain the liquidity, solvency, survival, and profitability of most companies. It is concluded that for this they must estimate that by collecting the pending accounts in the shortest possible time, which is equivalent to the average time required to convert accounts receivable into cash, the rotation of inventory to the greater number of times, that is to say, the average time that is required to convert the raw material in finished product ready for its distribution and later sale and paying the pending accounts (purchase of raw material, labor, etc.) as late as possible as long as that does not mean paying commissions. All this is constituted as a financial strategy for business development that allows having a positive working capital because every business must reach a state wherein its income exceeds its expenditures. In this sense, this financial strategy entails the effective management of each element of current assets and liabilities through planning, execution, and control. Consequently, the company maximizes its profitability, taking risks into account.