Introduction
Working capital, which is the sum of all the resources a business has at its disposal for its daily operations, is an indispensable element of any financial health of a business. The efficient management of working capital is the core element which ensures the financial stability is maintained and a company is doomed for a long term. Throughout this article we find out why having enough working capital is essential and also we provide different approaches to ensure working capital’s proper controlling.
Understanding Working Capital
Working capital is line the engine oil required for an enterprise/company for smooth functioning of the business, without any glitches. Working capital includes everything from cash, inventory, accounts receivable, and accounts payable. It measures a company’s efficiency to run business on short notice which keeps the balance between the working capital and ensures liquidity, providing a company with an opportunity to purchase the goods on time and to use the finances upon the unexpected events. Correct working capital guidance reflect weakness of operations and facilitate decline of liquidity shortages and enhance cash flow.
A working capital cycle means the period from the date of purchase of the goods, it’s processing, packing, marketing, and sales and collection of the sales proceeds.
Sufficient Cash is required for the daily operations of the business enterprise/company.
The daily operations include purchase, value addition, packing, marketing, administration, sales and collection of the sales proceeds. A working capital period ranges from 1-180 days, depending on the business.
The working capital is ascertained based on the Current assets available to be realised less the current liabilities to be settled.
Each enterprise/company has to meet the expenses and liabilities arising, irrespective of the realization of the sales done.
Most enterprises/companies have to resort to credit period offerings to their buyers. These enterprises/companies may or may not get credit from their suppliers. The credit offered will be of longer period compared to credit received.
The enterprises have to maintain an healthy rather sufficient working capital to meet the ends and also the settlement of emoluments and statutory liabilities.
Importance of Maintaining Sufficient Working capital are
- It will help in managing liquidity.
- Aids timely decision making
- To meet all statutory and mandatory payments
- Value addition and venturing into new business
- Earn short term profits
Proper working capital management ensures adequate funds for financing daily business operations and short-term obligations.
Key working capital advantages for a business are:
- Helps maintain solvency for a company by managing an uninterrupted process cycle.
- Prompt payment to suppliers helps improve the goodwill and creditworthiness of the business.
- Suppliers may provide cash discounts for timely payment of bills. It helps reduce costs, thereby improving profits.
- Helps businesses avail loans based on improved creditworthiness in the market.
- Helps efficiently manage any sudden financial crisis or market volatility.
Conclusion
It is hence important that a company stays afloat during a tight financial stability, from the revenue of a business to its growth and its resilience. It is crucial that companies to make sure their working capital is managed optimum level (i.e., having liquidity), which is necessary for the company’s day-to-day operation needs and investment, as well as for mitigating the financial risks. An implementation of efficient strategies in the management of working capital can improve the competitive edge of a business and open the doors to the future success of the company in the long run.
Conclusion
It is hence important that a company stays afloat during a tight financial stability, from the revenue of a business to its growth and its resilience. It is crucial that companies to make sure their working capital is managed optimum level (i.e., having liquidity), which is necessary for the company’s day-to-day operation needs and investment, as well as for mitigating the financial risks. An implementation of efficient strategies in the management of working capital can improve the competitive edge of a business and open the doors to the future success of the company in the long run.