Effective Working Capital Management is vital for companies to maintain financial health and run successful business operations. It includes a set of actions taken by businesses to ensure that they have enough funds to cover their ongoing operating costs while keeping resources invested productively. It is the key to successful management of cash flow and reduce dependency on banking finance.
WCM is a continuous responsibility focusing on a company’s daily operations involving matching short-term assets and liabilities.
By effectively managing a company’s Cash Flow, inventories, and accounts payable, financial managers can maintain smooth operations by avoiding disruption in supply chain and availability of stock leve; yet enhancing the earnings of the company. On the other hand, poor working capital management might result in lower credit scores, financial insolvency, legal issues, asset liquidation, and even bankruptcy.
Working Capital Management includes:
- Revenue collection
- Debt Management
- Liquidity Management
- Accounts Receivable Management
- Inventory Management
- Accounts Payable
WCM helps avoid cash flow issues
Cash Flow issues are a significant concern for business owners. According to some studies, 82% of businesses failed due to Cash Flow problems. Businesses failed due to lack of liquidity and is the life blood that ensure going concern of an enterprise quoting the famous adage: Cash is King
Cash Flow management manages cash inflows and outflows to meet the company’s short-term and long-term financial commitments. It plays a crucial factor in determining a company’s financial health and can help companies:
- Reduce risk exposure by increasing their ability to draw down funds when needed and minimize their need for borrowing by generating sufficient revenues from operations.
- Minimize their exposure to interest rate changes.
- Ensure they have enough Working Capital to continue operating without tapping into external sources such as credit or asset sales/acquisitions.
Properly managing liquidity ensures the company has enough cash resources for its regular business and emergency needs. It is essential to determine the success or failure of a business as it affects its creditworthiness.
It also ensures sufficient business capital is invested in assets while maintaining a good current and current assets and liabilities ratio. It improves the company’s cash management and keeps funds in the business liquid, reducing their reliance on external financing.
An organization’s ability to generate cash resources quickly and effectively to finance its operational needs is a sign of proper liquidity management. It can also be demonstrated by having an appropriate level of cash on hand.
Important to manage the day-to-day task
WCM is an essential part of running a business. It helps manage day-to-day tasks like paying vendors, purchasing inventory, keeping track of expenses, etc. The goal is to ensure that companies have enough money coming in so they don’t run out at the end of every month – which would be devastating if it happened because then they wouldn’t be able to keep up with their obligations!
Increase profitability and productivity
Working Capital Management increases organizational efficiency. Its primary goal is to increase the profitability of the business by perfectly managing the company’s payables and receivables. WCM also helps in the cost-effective acquisition and utilization of capital, allowing organizations to increase their profitability.
Ensures Continuous Business Operations
Working Capital Management ensures that business operations run smoothly and continuously. The goal is always to keep enough money on hand for the business. Paying employees’ wages and salaries on time will encourage them to work regularly, and the company will be able to cover daily operating costs with enough cash. It will result in continuous business operations.
To get a higher business valuation and enterprise value through efficient working capital management, check out KICK Advisory Services. They provide bespoke corporate finance solutions and help you achieve optimum business results.