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Operational Efficiency and Its Effect On Working Capital
What is Operational Efficiency?
Operating efficiency is the efficiency that is obtained due to efficient utilization of fixed and current assets and other resources of the firms. It is an indicator of better management and good health of a business firm. Operating efficiency is not easy to obtain because all of the resources of a company must work in tandem to achieve it.
Operating efficiency is the use of the resources of the company at the minimum cost. Therefore, it is the optimum utilization of funds at minimal expenses. As the companies strive to utilize all of the resources, the use of working capital is made effective through the process.
Effects of Operational Efficiency on Working Capital
Working capital is actually related to a company’s operating efficiency directly.
Let us see the effects of operating efficiency on working capital in the following points below −
Working with Minimum Working Capital
Operating efficiency is derived from the utilization of operating costs and fixed and current assets. The conversion of fixed and current assets helps the company in maintaining its working capital. In fact, the use of working capital is reduced due to optimum operating efficiency. Therefore, a company that has better operating efficiency can work with minimum working capital.
Reduces Cash Conversion Cycle
Another impact of operating efficiency on working capital that is worth a mention is the reduction of the cash conversion cycle. With better-operating efficiency, the use of working capital and the length of the cash conversion cycle are reduced. It helps a company become lean and have less working capital assigned for the improvement of the sales cycle.
This helps the company become profitable and productive in the long run. As operating efficiency improves, it reduces the cash conversion cycle which improves the overall operating cycle of the business. Improvement in the operating cycle leads to more profitability and revenues which is good for the business companies.
Reduces associated Costs
It is easy to see why companies strive to maintain better operating efficiency to grow and become profitable in the long run. Operating efficiency can not only reduce the dependence on working capital but it can also reduce the costs associated with completing a cash conversion cycle.
Reduces Dependence On Working Capital
Operating efficiency is directly linked with profitability. As the resources and assets of the company are used to their fullest possible extent, a company with optimum operating efficiency relies less on its working capital.
Therefore, when the operating efficiency is at the pinnacle, the company may reduce its dependence on working capital, and increase its profitability and returns from investment.
Helps Companies Maintain More Funds
Better resource utilization in the case of optimum operating efficiency removes the pressure from reliance on working capital. As the resources are used to their best, the funds of the company are saved and working capital is reduced. This helps the companies maintain more of the funds to use for good opportunities which help the company grow. This helps in the expansion of the company adequately.
Focus on Controllable Factors
It is worth a mention here that a company cannot manage all aspects of the operation to become profitable. For example, it is hard for a company to manage the prices of raw materials or wages of labor. However, it can manage the use of the materials and costs associated with hiring labor. Therefore, to gain operating efficiency, the companies must focus on controllable factors rather than the ones that are beyond the control of management. In this way, a company can run with minimum working capital.
Conclusion
The most important requirement for maintaining better operating efficiency is an efficient management team. The company’s management team must be able to use the resources of the company to the maximum in order to achieve maximum operating efficiency. This means that a company that wants to increase its efficiency must have a management that is aware of the company’s resources and knows how to use them to their optimum levels.
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