For modern businesses, leveraging ERP solutions like Deskera ERP can significantly enhance working capital management. Deskera ERP helps businesses automate financial processes, track real-time cash management working capital flow, and optimize inventory management. With built-in analytics and AI-driven insights, it enables decision-makers to improve financial stability and reduce operational inefficiencies. Identify current assets (cash, accounts receivable, inventory) and current liabilities (accounts payable, short-term debt). HighRadius’ Cash Forecasting Software utilizes AI-driven algorithms to help businesses achieve up to 95% forecasting accuracy, enabling proactive management of liquidity and working capital.

• For example, a business can decrease its credit term offered to customers, achieve better efficiencies within the production process and negotiate better credit terms with suppliers.
• It is necessary for the firms to achieve a desired operational efficiency (Banerjee & Deb, 2024).
• On the other hand, working capital deficiencies leads to rigidity in the liquidity position and disrupts the day to day activity of the firms (Aktas et al., 2015;Baños-Caballero et al., 2014).
• As recommended (Cooper et al., 2007;Sarkis, 2007), the quantity of observations justifies the application of the DEA technique.

Accounts Payable

It’s a commonly used measurement to gauge the short-term financial health and efficiency of an organization. Managing working capital means managing inventories, cash, accounts payable, and accounts receivable. Proper management of working capital is essential to a company’s fundamental financial health and operational success as a business. A hallmark of good business management is the ability to utilize working capital management to maintain a solid balance among growth, profitability, and liquidity.

Inefficient Inventory Management

Net working capital in financial management is the difference between a company’s current assets and current liabilities. The static approach is based on financial statements particularly the balance sheet. An examination of CL gives us Gross Working Capital, whereas the difference between CA and CL gives Net Working Capital (NWC) (Brigham & Ehrhardt, 2015). The operating cycle approach considers Cash Conversion Cycle (CCC) as avital element. The focus, in this is on the duration needed for cash transformation starting from inventory management, sales and then to cash. For this, metrics such as accounts receivable, accounts payable, inventory holding period, purchase and sales activities act as important measurements (Deloof, 2003;Nabi et al., 2016;Richards & Laughlin, 1980).

By complementing working capital with other financial metrics that provide insights into operations, profitability and financial stability, you can make better-informed decisions about managing your growing business. Working capital measures a business’s operating liquidity—it illustrates how much readily available cash and assets the business has to cover day-to-day expenses and keep operations running smoothly. The study makes a significant contribution to the literature by examining the relationship between managerial ability and working capital efficiency using advanced methodological tools.

Accurate Financial Reporting & Insights

As highlighted, the UET lays down the idea that senior executives are instrumental in corporate outcomes (Hambrick & Mason, 1984). High skilled managers show better competence and experience towards resource utilisation and decision making enabling them to implement superior WCM. On the other hand, less capable managers may engage in individual opportunistic behaviour prioritising personal goal and aims.

This measure captures how variations in managerial skill impact performance metrics, operational efficiency, and strategic decision-making across firms. First, corporate productivity is estimated via DEA, which compares sales revenue (output) against inputs such as operating expenses, goodwill, R&D, COGS, net PP&E, and intangibles. Secondly, MA is derived as a residual from the first step regression which controls for corporation specific characteristics, isolating managerial efficiency. This method highlights how effectively managers use resources to enhance revenue, providing a robust measure of their impact on firm performance (Demerjian et al., 2012). Using a balanced panel dataset of 150 listed companies from the National Stock Exchange (NSE) of India for the period 2014–2023, the study employs Data Envelopment Analysis (DEA). WCME is assessed as a multidimensional efficiency metric incorporating inventory, accounts receivable, accounts payable, cost of goods sold , net revenue, and net income.

Poor management of working capital can lead to cash shortages, production delays, and even business failure. Getting a true understanding of your working capital needs may involve plotting month-by-month inflows and outflows for your business. A landscaping company, for example, might find that its revenues spike in the spring, then cash flow is relatively steady through October before dropping almost to zero in late fall and winter. Yet on the other side of the ledger, the business may have many expenses that continue throughout the year.

Market Context and Capital Efficiency

Based on the equation the regression model M1 is created for assessing the impact of MA on WCME. The WCME is treated as the dependent variable to evaluate its relationship with other variables. The Accounts Payable (AP), Inventory (INV), Accounts Receivable (AR), and Cost of Goods Sold (COGS) were considered as inputs while outputs were Net Revenue (NR) and Net Income (NI). Using WCME (Habib & Dalwai, 2024), as a dependent variable offers a broader perspective on efficiency than traditional measures such as CCC. While CCC measures only the conversion time, WCME incorporates a broader set of inputs (inventory, COGS, AR, AP) and outputs (net revenue, net income), providing a multidimensional aspect. The results demonstrate that MA significantly enhances WCME, particularly in firms with lower TBQ.

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As recommended (Cooper et al., 2007;Sarkis, 2007), the quantity of observations justifies the application of the DEA technique. Across the population, the National Industry Classification (NIC) which provides Industry and Sector data of Indian companies have been used to calculate MA (Demerjian et al., 2012). This is because the gamut of managerial decision-making is wide and touches every corner of an enterprise. There have been notable attempts to quantify MA, however, it remains to be complex and challenging (Bertrand & Schoar, 2003;Demerjian et al., 2012).

Strengthen Liquidity Position

Working Capital includes all current assets and liabilities as shown on the balance sheet, while Net Working Capital focuses specifically on operational components, providing a more accurate picture of day-to-day liquidity needs. Positive working capital generally means a company has enough resources to pay its short-term debts and invest in growth and expansion. Conversely, negative working capital indicates potential cash flow problems, which might require creative financial solutions to meet obligations. Even a profitable business can face bankruptcy if it lacks the cash to pay its bills. For example, if a company has $1 million in cash from retained earnings and invests it all at once, it might not have enough current assets to cover its current liabilities.

• The moderate approach is for businesses that want a middle ground between two extreme approaches.
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• Second, while GEE accounts for within-panel correlation, it fails to address endogeneity.
• Efficient working capital management allows a company to maintain smooth operations, meet its obligations, and invest in growth.

There are different methods that businesses can use to manage their liquidity position. Since liquidity is mainly concerned with the cash flows of a business, cash management can play an important role in managing liquidity. Another way that businesses can manage their liquidity is through working capital management. With advanced ERP solutions like Deskera ERP, businesses can track real-time cash flow, monitor receivables and payables, and optimize inventory management.