What IT Managers Need To Know About Working Capital

by drjim on September 20, 2012

Image CreditCash is what makes the business go 'round…

Cash is what makes the business go 'round…

Have you ever wondered how your company pays its bills? I mean, every day when you come to work, the lights are on, the security guard is working, and food is served in the cafeteria. Somehow, thanks to the efforts of your company’s leadership, that is all getting paid for, but how? The secret my dear IT manager lies in the world of working capital…

What Is Working Capital?

We’ve all probably heard of “capital” and “working capital” before, but what is it? In short, working capital is the amount of money that a company has available to spend today. A fancy way of saying this is that working capital is a company’s liquid finances – it can get its hands on it right now.

You would think that having more working capital than less would always be a good thing, right? Well, yes and no. Clearly having access to too little working capital can put a company in a bad position – management may not be able to pay their bills. However, at the same time having too much working capital may result in the company having to pay financing costs (that working capital had to come from somewhere).

The Impact Of Inventory?

All too often working capital is not just laying around at a firm in the form of piles of cash. Although that sure would be nice. Instead, it’s often tied up in the company’s inventory. This may go a long way to explain why so many of the projects that your IT dream team works on have to do with inventories. Just like working capital, a company doesn’t want to have either too much or too little inventory.

The balance here is that if a company carries a lot of inventory they can quickly fill customer orders. That is a good thing. However, having a lot of inventory also means that any unsold goods are getting older every day that they sit on the company’s warehouse shelves. Depending on how fast things change in the industry that your company competes in, the value of the items in your company’s inventory may be decreasing by as much as 2% per day!

What All Of This Means For You

Just like a car that needs to have gas in its tank in order to be able to go anywhere, a company needs to have working capital in order to pay its bills. Careful management of this valuable resource is required in order to ensure that the company does not have either too much or too little of it.

One of the key areas where working capital will show up in any company is in its inventory. Much of what an IT team is called on to do will probably have something to do with managing or tracking the company’s inventory.

Realizing the importance of working capital is something that every IT manager needs to do. This understanding can go a long way in making sure that you are able to grasp the motivation behind decisions that your upper management makes.

– Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World IT Management Skills™

Question For You: What role do you think that IT can play in helping a company to keep its inventory at a minimum level?

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What We’ll Be Talking About Next Time

As an IT manager you are going to want to be able to show some leadership and be able to have intelligent conversations with the people who are running your company. More often than not, those people are either going to be working in the company’s finance department or they are going to have a finance background. This all means that your management is going to be using big words like “leverage” that you’re going to have to understand. Let’s do something about that right now.

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