Meaning
Financial management priorities focus on maintaining sufficient liquid assets to meet short-term operational needs. Practicing working capital preservation ensures that a company has the cash needed to pay its workers and suppliers without taking on new debt. This discipline applies to the management of cash, inventory and accounts receivable, but it does not cover long term investments in buildings.
Liquidity Protection
Cash reserves are guarded to handle unexpected repairs or a sudden drop in sales. Working capital preservation involves delaying non-essential purchases and negotiating better terms with vendors. A firm with plenty of cash can survive a crisis that would bankrupt a competitor with no savings.
Inventory Control
Stock levels are kept at the minimum amount required to keep the factory running. Through working capital preservation, a manager avoids buying too much raw material that will sit in a warehouse for months. This approach reduces the amount of money tied up in physical items that are not yet generating revenue.
Cash Management
Payment cycles are monitored to ensure that money comes in faster than it goes out. Achieving working capital preservation requires a strict follow up on unpaid invoices and a careful schedule for paying bills. When a company collects its debts in thirty days but pays its own bills in sixty, it generates a surplus of cash.
This surplus can be used to fund small improvements without asking for a bank loan. Constant attention to these ratios prevents the business from running out of money during a seasonal slow period.
