Business managers have created and adopted a strategy to monitor their current assets and liabilities (working capital) which is called the working capital management. It is a very important business concept that calculates the asset of a company’s finances and operations. Most people regard it as the standard metric for the performance of any business.
Working capital management controls the free credit given to the accounts receivables, keeps the cash and stock levels at optimum and monitors the effectiveness of a credit policy implementation. You can sue this strategy to speed up the working capital cycle of your company and ease the liquidity position. You can also use this to extend the credit available in the accounts payable to avail the trade credit.
Here are some advantages of working capital management
It ensures liquidity
Some businesses may get into deep trouble when they don’t have enough money for operation and to repay both their long term and short term loans. This is common because most businesses have and ineffective way or work capital management or they do not implement the policy at all. A good working capital management will ensure some liquidity through monitoring the receivable accounts, payable accounts, debt and stock management. Through this management process, you will keep more liquid cash in the business.
It helps evade interruptions in some operations
A working capital management involves the use of a ratio analysis to calculate, interpret and provide information that will help with the management of funds. The ratios include quick ratios, account receivable turn over and capital ratios among others. The information is also helpful in effective planning and executing of businesses by managers. The optimum usage of work capital management will wipe away any distractions in future business operations.
It enhances profitability
A good use of the working capital management strategy will enhance the profitability of your company in the long run. The policy is meant to manage your inventory properly so that you will not face any operational failures. The receivables management is a very important part of the capital management, and this policy ensures that they are collected on time. it also helps in paying the trade payable amount on time and enhances the allocation of cash.
It improves the financial health
The working capital management also deals with general management of the money in your enterprise. You can asses the sources of cash flow and determine its outflow in the best ways. A good cash allocation will help you create an investment for the remainimg money or help you pay off your short term loan son time.
It is a form of value addition to your company
The working capital will improve your company’s financial and operational success. It will make your company stand out among other competitors and peers. You will also get a sense of respect in your field of industry. This will add a huge value to your company.
The final word
A working capital is very effective in allocating your company’s assets to your liabilities. When controlled by a professional, it can be a real benefit to your company.