Importance Of Working Capital Management In Business

Working capital is anything that makes money or adds value to a company, like the places where they make their products, their patents, and their financial assets. It's the main goal of any business to make sure its capital is used in a way that increases its profits. Knowing how to do it right can make all the difference between success, growth, and staying in business. Here's what working capital is and why it's important.

What Is Working Capital Management?

Working capital management is the strategic management of a company’s working capital assets and liabilities to maximize short-term returns. It involves monitoring and minimizing operational costs, as well as inventory management, to optimize asset utilization. Working capital can be managed in a variety of ways, depending on a number of factors.

Also Read: Top 5 Car Leasing Companies In India

Importance Of Working Capital Management

1. Helps To Manage Liquidity And Short-Term Debts

Business liquidity refers to a company's ability to pay its debts on time, without interrupting its operations, selling assets, or taking on additional debt to free up cash, etc. Therefore, one of an accountant's primary duties is to track a company's financial situation to ensure that current assets exceed current liabilities. Whereas current assets are physical assets that can be exchanged for cash within one year, current liabilities are amounts of money to be repaid to creditors in one year. Therefore, businesses face cash flow difficulties if their total liabilities are greater than their assets.

2. To Improve Credit Profile

Short-term cash flow plays an important role in long-term cash flow management and is often used as a proxy for counterparty credit exposure. A good working capital management strategy will allow a company to make timely payments on short-term liabilities, such as raw material payments, wage payments, and other operational expenses.

3. Smooth Trading And Production

Making timely payments to vendors or creditors is essential for your business's successful operation. Neglecting to do so may result in delayed delivery of raw materials, which may be necessary for production or the delivery of exchanged goods. This may lead to a decrease or even a complete cessation of production or sales. These activities can have a detrimental effect on the reputation of any entity.

4. Increased Profitability

Policies like extending credit to customers, giving cash back, and offering easy monthly payments all have their own interest charges, either built into the policy or made explicit. Working capital management is important as it helps cut down on interest costs, which means more money for your business.

5. Aids In Expansion Of The Business

Any entity that wishes to grow its business will require a sufficient amount of working capital to do so. It is necessary to finance purchase orders and extend credit periods to more clients. Without a sufficient and growing amount of working capital, any business will find it difficult to expand its business.

6. Helps To Earn A Short-Term Profit

Occasionally, a company may possess surplus funds. When assessing the working capital, a company's current assets to working capital ratio indicates excess funds over its working capital needs. The surplus funds can then be utilized by the company to generate short-term profits.

7. Adds Value To Business

Having enough working capital means you have enough money in your bank account to pay your bills and cover short-term commitments. This makes your business more creditworthy in the market, gives you better negotiating power, and helps you make more money. Plus, it adds value to your business and helps you reach bigger organizational goals.

Also Read: 5 Best Loans For Women Entrepreneurs In India

How To Improve Working Capital Management?

It's important for businesses to be able to adjust their working capital needs to seasonal and business cycle changes, and increase or decrease their working capital accordingly. Another important thing to keep in mind is innovation. For example, if we take the finance sector, the easy application process for loans has been made by several financial institutions. This was because many institutions emphasized enhancing customer experience by having innovative products. Finance expert and Poonawalla Fincorp’s MD, Abhay Bhutada stated that the company’s strategy evolved by not only managing expenses, employees, and infrastructure but also integrating technology.

Also Read: 5 Ways To Get A Loan With A Low CIBIL Score

Summing Up

In conclusion, in order to prevent financial distress and avoid bankruptcy, a company must have sufficient cash flow to pay its employees, service its debts, pay its liabilities on time, and respond promptly and efficiently to competition and market changes. A comprehensive working capital management strategy should anticipate all these elements and help to consolidate a company’s past successes while setting the foundation for future success.