The working capital of a company or business, regardless of size, is the capital used in daily trading operations. Working capital is calculated as the current assets minus the current liabilities. Essentially, working capital keeps businesses running on a daily basis, and with that comes the management of working capital. Surely there are efficient and inefficient ways to do so. Managing working capital in an efficient way is integral to business success, and it is an accounting strategy and system that balances the company’s current assets and its financial obligations in an effort to ultimately boost the company’s earnings.
Working capital also serves as a baseline for how financially stable a business or company is in the short-term, and if it has the cash-flow to cover its debts as well as expenses, all while continuing growth. Working capital ends up being a litmus test for a business’ success and health. With a steady working capital management system, operations within a business can remain smooth and allow for growth without financial volatility. When a company doesn’t have proper working capital management, leading to insufficient funds, financial insolvency can be a potential consequence, leading to bankruptcy.
There are countless articles and resources on the subject of working capital management, and a few have been highlighted. In an article from SoftCo, 5 tips for effectively managing working capital have been outlined. They include:
1. Manage procurement and inventory
2. Pay vendors on time
3. Improve the receivables process
4. Manage debtors effectively
5. Make informed financing decisions
These 5 tips can improve a business’ working capital, and create positive benefits. Some of the benefits of positive working capital include improved liquidity, operational efficiency and increased profits. An additional article from AllBuisness outlines 9 ways to better manage working capital, including:
1. Maintaining working capital is everyone’s responsibility
2. Pay suppliers on time
3. Control expenses carefully
4. Watch your stock
5. Consider introducing e-procurement
6. Talk to alternative lenders
7. Emergency loans can be a short term solution
8. Asset-based financing can be an asset
9. Invoice factoring and discounting releases the cash tied up in your sales ledger
Within both of these articles, there is overlap on some of their ideas, as well as unique ones. Learning to efficiently and effectively manage a business’ capital is crucial to continued success. This responsibility comes with making decisions that will affect how consistently a business grows and can increase profits. The benefits of consistency will allow for businesses to have the cash-flow to pay more employees, obtain new clients, and invest in the future of the business in general.
Are you ready to grow and protect your business? Impello Global is a trade finance advisory boutique and trade credit and political risk insurance brokerage, headquartered in Seattle, Washington. We specialize in trade credit and political risk insurance and provide advisory services to companies and lenders who are looking to expand their trade finance capabilities.
If you are a company or a lender trying to better understand trade credit insurance or looking for guidance as to how trade credit insurance can help improve working capital financing, our team would be delighted to learn more about your business and discuss options available to you. Please visit our website at www.impelloglobal.com or contact us directly at info@impelloglobal.com.
Sources: https://www.investopedia.com/ask/answers/100715/why-working-capital-management-important-company.asp