If “cash is king,” working capital is “heir to the throne” in the face of hostile credit and equity markets. A company that can fund operations and build a cushion of liquidity is in a good position to weather this economic cycle.
Managing working capital takes a sure hand, however. Too much working capital lowers return on investment and has a negative impact on enterprise value, while too little working capital quickly leads to dangerous dysfunction.
The right level of working capital, in contrast, significantly improves cash flows and releases capital from the balance sheet. That capital, in turn, can be used to reduce debt, pay dividends or reinvest in growth. In large organizations, the challenge is to get the right balance due to the cross-functional nature of operations.