Zero Working Capital
Working capital is the comparison of current assets to current liabilities. For most organizations, current assets exceed current liabilities and working capital, therefore, represents the liquid reserves for meeting current obligations. It is a situation in which there is no excess of current assets over current liabilities to be funded. Creditors prefer high levels of working capital since they are concerned about receiving payment. However, management prefers low levels of working capital since working capital earns an extremely low rate of return. Some companies are now driving working capital to record low levels, so-called Zero Working Capital. By keeping working capital at zero, funds are released for many other opportunities.
Zero Working Capital requires major changes in how an organization functions. One way to implement a Zero Working Capital is to have a demand-based organization. It is a working capital strategy that closely relates to the Just-in-Time methodology. The idea is to reduce the investment needed to grow the business – whether debt or equity.
Zero working capital also refers to the equality between current assets and current liabilities at all times. Demand-based organizations do everything only as they are demanded: Fill customer orders, receive supplies, manufacture products, and other functions are done only as needed. The production facilities run 24 hours a day non-stop according to the demands within the marketplace. There are no inventories; everything is supplied immediately as needed. The end result of this demand-driven organization is that little if any, working capital is necessary to run the business.