A closer look at working capital could pay big dividends in cash flow and valuation
The report by the National Center for the Middle Market surveys the attitudes of decision makers regarding their organization’s management of working capital, or the timeframe and manner in which it collects and divides resources. There are three main components to working capital: payables (what a business owes), receivables (also known as collections) and inventory.
“In the ordinary course of business, [working capital is] money that you have tied up doing the things you need to do,” says the center’s executive director, Thomas Stewart. “If I’ve billed you, and I haven’t gotten paid yet, that is my money that is tied up waiting while the check is in the mail.”
According to this report, three-quarters of respondents say they are either very or extremely satisfied with how their business manages its working capital. However, when the report benchmarked responses against financial performance for publicly traded middle market companies, it found the fastest-growing middle market companies were managing their working capital much better than their more modestly performing counterparts. Moreover, the lopsided advantages were consistent among companies across all industries and all of the tiers within the middle market.