The main considerations of working capital management decisions are

(1) cash flow/ liquidity and

(2) profitability/return on capital.
Identify which factors influence a company's working capital management decisions
The decisions relating to working capital are always current (i.e., short-term decisions.
The most useful measure of profitability is return on capital (ROC).
One measure of cash flow is provided by the cash conversion cycle (CCC)the net
number of days from the outlay of cash for raw material to receiving payment from the
customer.
The most useful measure of profitability is return on capital (ROC).
liquidity
Availability of cash over short term: ability to service short-term debt.
working capital
A financial metric that is a measure of current assets of a business that exceeds
its liabilities and can be applied to its operation.
Working capital is the amount of capital which is readily available to an organization. That is,
working capital is the difference between resources in cash or readily convertible into cash
(current assets), and cash requirements (current liabilities). As a result, the decisions relating
to working capital are always current (i.e., short-term decisions). In addition to the time
horizon, working capital decisions differ from capital investment decisions in terms of
discounting and profitability considerations; they are also "reversible" to some extent.
Working capital management decisions are, therefore, not made on the same basis as longterm decisions, and working capital management applies different criteria in decision making:
the main considerations are (1) cash flow/liquidity and (2) profitability/ return on capital (of
which cash flow is generally the most important).
1. Cash Conversion Cycle (CCC)

One measure of cash flow is provided by the cash conversion cyclethe net number of days
from the outlay of cash for raw material to receiving payment from the customer. As a
management tool, this metric makes explicit the interrelatedness of decisions regarding
inventories, accounts receivable and payable, and cash. Because this number effectively
corresponds to the time that the firm's cash is tied up in operations and unavailable for other
activities, management generally aims at a low net count.

Cash cycle
Cash conversion cycle is a main criteria for working capital management.
2. Return On Capital (ROC)

In this context, the most useful measure of profitability is return on capital (ROC). The result
is shown as a percentage, determined by dividing relevant income for the 12 months by
capital employed; return on equity (ROE) shows this result for the firm's shareholders. Firm
value is enhanced when, and if, the return on capital, which results from working-capital
management, exceeds the cost of capital, which results from capital investment decisions as
above. ROC measures are, therefore, useful as a management tool, in that they link short-term
policy with long-term decision making.

Credit policy

Another factor affecting working capital management is credit policy of the firm. It includes
buying of raw materials and selling of finished goods either in cash or on credit. This affects
the cash conversion cycle.

A significant part of decision making skills is in knowing and practicing good decision
making techniques. One of the most practical decision making techniques can be summarized
in those simple decision making steps:
1. Identify the purpose of your decision. What is exactly the problem to be solved?
Why it should be solved?
2. Gather information. What factors does the problem involve?
3. Identify the principles to judge the alternatives. What standards and judgement
criteria should the solution meet?
4. Brainstorm and list different possible choices. Generate ideas for possible
solutions. See more on extending your options for your decisions on my
brainstorming tips page.
5. Evaluate each choice in terms of its consequences. Use your standards and
judgement criteria to determine the cons and pros of each alternative.
6. Determine the best alternative. This is much easier after you go through the above
preparation steps.
7. Put the decision into action. Transform your decision into specific plan of action
steps. Execute your plan.
8. Evaluate the outcome of your decision and action steps. What lessons can be
learnt? This is an important step for further development of your decision making
skills and judgement.

problem-solving and decision-making

simple processes for problem-solving and decision-making

Problem solving and decision-making are important skills for business and life.
Problem-solving often involves decision-making, and decision-making is
especially important for management and leadership. There are processes and
techniques to improve decision-making and the quality of decisions. Decisionmaking is more natural to certain personalities, so these people should focus
more on improving the quality of their decisions. People that are less natural

decision-makers are often able to make quality assessments, but then need to be
more decisive in acting upon the assessments made. Problem-solving and
decision-making are closely linked, and each requires creativity in identifying and
developing options, for which the brainstorming technique is particularly useful.
See also the free SWOT analysis template and examples, and PEST analysis
template, which help decision-making and problem-solving. SWOT analysis
helps assess the strength of a company, a business proposition or idea; PEST
analysis helps to assess the potential and suitability of a market. Good decisionmaking requires a mixture of skills: creative development and identification of
options, clarity of judgement, firmness of decision, and effective implementation.
For group problem-solving and decision-making, or when a consensus is required,
workshops help, within which you can incorporate these tools and process as
appropriate. Here are some useful methods for effective decision-making and
problem-solving: First a simple step-by-step process for effective decision-making
and problem-solving.

decision-making process
1. Define and clarify the issue - does it warrant action? If so, now? Is the matter urgent,
important or both. See the Pareto Principle.
2. Gather all the facts and understand their causes.
3. Think about or brainstorm possible options and solutions. (See brainstorming process)
4. Consider and compare the 'pros and cons' of each option - consult others if necessary
or useful - and for bigger complex decisions where there are several options, create a
template which enables measurements according to different strategic factors (see
SWOT, PEST, Porter).
5. Select the best option - avoid vagueness and weak compromises in trying to please
everyone.
6. Explain your decision to those involved and affected, and follow up to ensure proper
and effective implementation.
Decision-making maxims will help to reinforce the above decision-making process whether
related to problem-solving or not, for example:
"We know what happens to people who stay in the middle of the road. They get run down."
(Aneurin Bevan)
"In any moment of decision the best thing you can do is the right thing, the next best thing is
the wrong thing, and the worst thing you can do is nothing." (attributed to Theodore
Roosevelt - more maxims on the quotes page)

There is often more than one good answers when you are faced with a complex decision.
When you've found the best solution you can find, involve others in making it work, and it
probably will.
(More useful rules, acronyms and training ideas on the acronyms page.)

pros and cons' and 'weighted' decision-making methods

A simple process for decision-making is to compile a 'weighted' scored , of 'pros and cons'
list.
Pro means 'for', and con means 'against' - i.e., advantages and disadvantages.
For more complex decisions, several options can be assessed against differing significant
criteria, or against a single set of important factors. In any case, factors/options can be
weighted and scored appropriately.
The 'pros and cons' method can be used especially for two-option problem-solving and
decision-making issues where implications need to be understood and a decision has to be
made in a measured objective sense.
Using a 'weighted list' scoring method is especially useful in big organizational or business
decisions, especially which involve lots of different strategic considerations (as in SWOT and
PEST and Porter's Five Forces concept). In such situations you can assess different options
according to a single set of criteria (the most important considerations), or you can allocate
weighted/scored criteria differently to each option (examples of templates are below).
Some decisions are a simple matter of whether to make a change or not, such as moving,
taking a new job, or buying something, selling something, replacing something, etc. Other
decisions involve number of options, and are concerned more with how to do something,
involving a number of choices. Use the brainstorming process to identify and develop options
for decision-making and problem-solving. If involving a group in the process then running a
workshop is often a good approach.

complex problems and decisions - tips

For complex decisions and problems involving more than two possible options you can use a
template with additional columns, in which case each column represents a different option,
and the rows enable scoring according to the different weighted strategic considerations.
Or establish a single set of criteria across which to score several different otions.
So, in using more than one two columns you can assess options according to:

differing weighted criteria for each of the options, or

a single set of criteria.

Choose the method(s) which offer you the easiest approach, given the types of options
available, and whether you are involving other people in the process.
Where a team of people, or different departments, are involved in the decision-making for
lots of options/variations within a big complex situation, it can be useful to delegate the
formulation of different two-column 'pros and cons' templates to different teams/people, and
this can be a powerful aid to subsequent group discussions. This enables options to be
eliminated and filtered and a shortlist of fewer options to be estabished.
In complex situations the wording of the options is important, for example, if considering the
best path for one's own career and work development the options might be:

be employed, working for a big company

be self-employed, working as a consultant or freelancer from home

start a business, with premises and staff

A situation like this can be approached by completing three separate pros and cons tables and
then comparing the net effects (difference between weighted pros and cons) of each one, or
by completing one three-column template, and scoring the main considerations across all
three options.
Here's an example of a three-option organizational decision:

develop a range of industrial cleaning products

develop a range of industrial cleaning services

develop a network of distributors for industrial cleaning products and

services

Criteria for weighting/scoring and thereby comparing the above three strategic options might
typically include factors such as:

investment/costs required

profitability (gross margin, financial contribution, etc)

overhead use/demand

competitive advantage

ease of market access

training needs

speed, etc, etc

In both of the above examples the scoring criteria can be more precisely and relevantly
established with the aid of other tools like SWOT and PEST and Porter's Five Forces.
Also consider that some decisions and challenges are difficult because you don't have the
necessary knowledge or experience, in which case you need first to decide if the decision or
challenge is actually appropriate and necessary for you at this stage.
If you don't have the necessary knowledge or experience to compile a decision-making
template, then you are not in a good position to make the decision, and you need to bring in
the necessary knowledge and experience.
Some decisions have to be made when you are not ready, in which case it is all the more
importnat to be as measured as you can be, rather than resort purely to instinct.
Other decisions may seem urgent and necessary, but actually - if you probe and challenge the
situation - might not actually be necessary at all.
Do not be forced into a decision if having considered the implications carefully you decide
that it's not the best thing to do. The decision to do nothing is often a perfectly good option.
Whatever you do - try to be as objective and measured as you can be, and where it's
appropriate or necessary, definitely seek input from others.
Well prepared decisions are easier to make and to implement, and generally produce the best
results.