The ability of a business to operate into the foreseeable future largely depends on how it is able to manage its Working Capital position on a daily basis. The Working Capital Position must be determined on a daily basis so as to prompt decision-makers as to the way forward and also the strategy to adopt at each stage.
Working capital management according to Investopedia is a business strategy designed to ensure that a company operates efficiently by monitoring and using its current assets and liabilities to the best effect.
Meaning as business management(decision-makers) must have a strategy in place with regards to the management of its working capital which will focus on the efficient utilisation of its current assets i.e Cash, Receivable, Inventory and its current liabilities(Trade Payables, Accrued Expenses etc.).
A hallmark of good business management is the ability to utilize working capital management to maintain a solid balance between growth, profitability and liquidity. A business uses working capital in its daily operations. Working capital serves as a metric for how efficiently a company is operating and how financially stable it is in the short-term. The current ration ratio, which divides current assets by current liabilities, indicates whether a company has the adequate cash flow to cover short-term debts and expenses.
The Importance of Working Capital Management
Working capital is a daily necessity for businesses, as they require a regular amount of cash to make daily payments, cover unexpected costs, and purchase basic materials used in the production of goods and services in its operations.
Efficient working capital management helps maintain smooth operations and can also help to improve the company’s earnings and profitability. Management of working capital includes inventory management and management of accounts receivables and accounts payables. The main objectives of working capital management include maintaining the working capital operating cycle and ensuring its ordered operation, minimizing the cost of capital spent on the working capital, and maximizing the return on current asset investments.
Working capital is an easily understandable concept, as it is linked to an individual’s cost of living and, therefore can be understood in a more personal way. Individuals need to collect the money that they are owed and maintain a certain amount on a daily basis to cover day-to-day expenses, bills, and other regular expenditures.
Working capital is a general metric for the efficiency, liquidity and overall health of a company. It is a reflection of the results of various company activities, including revenue collection, debt management, inventory management and payments to suppliers. This is because it includes inventory, trade creditors and receivable, cash, portions of debt due within the period of one year and other short-term accounts.
The needs for working capital vary from industry to industry, and they can even vary among similar companies. This is due to several factors, including differences in collection and payment policies, the timing of asset purchases, the likelihood of a company writing off some of its past-due trade debtors, and in some instances, capital-raising efforts a company is undertaking.
Working capital management is essentially an accounting strategy with a focus on the maintenance of a sufficient balance between a company’s current assets and liabilities. An effective working capital management system helps businesses not only cover their financial obligations but also boost their earnings because
Managing working capital means managing inventories, cash, trade creditors and accounts receivable. An efficient working capital management system often uses key performance ratios, such as the working capital ratio, the inventory turnover ratio and the collection ratio, to help identify areas that require focus in order to maintain liquidity and profitability.
In conclusion once we know that the ability of a business to operate effectively largely depends on its efficient management of its working capital i will entreat all business owners to have it as part of their business policy so that there will be guidance in daily operations.