What is Working Capital?
The working capital of a company is the capital used in daily trading operations. Working capital is calculated as the current assets minus the current liabilities and keeps businesses running on a daily basis. Managing working capital in an efficient way is integral to maintaining a healthy cash flow. It is an accounting strategy and system that balances the company’s current assets and its financial obligations which can help boost earnings.
The Importance of Working Capital Management
Working capital also serves as a baseline for how financially stable a business is in the short-term. It indicates whether a company has enough cash flow to cover its debts and expenses while continuing to grow. 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, financial insolvency can be a potential consequence which can ultimately lead to bankruptcy.
Resources for Successful Working Capital Management
There are countless articles and resources on the subject of working capital management. We like this article from SoftCo, which provides 5 tips for effectively managing working capital:
1. Manage procurement and inventory
2. Pay vendors on time
3. Improve the receivables process
4. Manage debtors effectively
5. Make informed financing decisions
An additional article from AllBuisness effectively 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
The Bottom Line
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 businesses to have the cash-flow to pay more employees, obtain new clients, and invest in the future of the business in general.
Sources: https://www.investopedia.com/ask/answers/100715/why-working-capital-management-important-company.asp