Chapter 49
FINANCIAL MANAGEMENT : Managing working capital

Working capital is an investment, like any other, and accordingly it has to be managed. Management of working capital does not necessarily mean reducing it at all costs. Working capital is the result of a playoff between liquidity and margins.

Over and above waste, which is relatively simple to eliminate but which requires determina- tion and an ongoing effort, working capital can only be reduced at the expense of EBIT or at the cost of investing in modifying the firm’s economic model.

In crisis periods, the firm will focus on reducing working capital in order to generate cash, which is useful for paying down debt or self-financing projects. The impact on margins is less of an issue. During economically good times, the firm will focus more on sales and margins than on working capital.

All of the techniques and tools for managing working capital are described in this chapter.

Financial managers will not be able to put in place measures for managing working capital without the close collaboration of operational managers responsible for purchasing, stocks, logistics, production, sales and human resources, over whom financial managers have no authority. Over and above the fight against waste, managing working capital often quickly leads to strategic decisions involving the firm’s commercial, production and logistics policies.

Financial managers will, this time internally, have an opportunity to demonstrate their teach- ing skills and negotiating talents.