Working capital actually is a day-to-day need for the companies, because they might require money to run the program and routine repayments, unexpected costs, as well as for buying raw materials in their manufacturing of goods. Your importance of working capital management vary from trade in business, and they can even vary among alike businesses. This might be due to some aspects, plus variations in range as well as cost policies. Significance of working capital management is use as a matrix effectiveness, liquidity and overall health of an organization. It is a representation of company’s activities, debt management, inventory management, sales collection and repayments towards suppliers.
Importance of Working Capital:
Accountability is one of the key importance of working capital. I helps to measure and maintain required balances to achieve a good working capital ratio of a company.
1. Improve Liquidity and Business Valuation:
A quantity of money can be tied-up inside working capital, so that your firm managing this effectively could get benefits from improving cash liquidity and may not depend on external financing. This really is especially essential for small companies while they typically have a tough time in getting financing from external sources. Furthermore, smaller businesses often understand the importance of working capital management, which allows a business to better allocate its resources and to improve its financial management strategies and techniques. Businesses with more effective working capital management will create much more cash liquidity and can lead to a higher business valuation.
2. Increasing Profitability and Returns on Capital:
Management concerning account payable and receivables looks excellent significant driver for increasing profitability of small businesses. In addition, when companies using low working capital can publish the best greater return on capital so that shareholders will always get advantage of high returns for all dollar invested in your business.
3. Capability to Face Financial Situations / Risks:
Importance of working capital management will assist the company in order to survive in situations like: crisis, unexpectedly big buy orders, manufacturing issues in the event of excellent. With enough liquidity, company pays to their suppliers on time, which will also benefit starting a regular and smooth flow of raw materials; client can receive goods and services on or before time, as well as ensuring that the manufacture unit remains uninterrupted due to any kind of financial risks or uncertainty.
4. Improve Solvency and Credit Rating:
Your ability to meet short-term commitments is a prerequisite towards long-term solvency plus commonly good indicator of counter-party’s credit risk. Sufficient working capital management allows the business in order to cover its short-term commitments on time that might consist of payment for the salaries, operational expenses, buy of raw items and materials, etc.
Importance of Working Capital Management:
Efficiently maintaining a balanced ratio between current assets and current liabilities is called working capital management. Significance of Working capital management ensures that that the company has enough monetary liquidity to meet short-term debts. Structuring an effective working capital management is a great way to enhance the income. Ratio analysis and management of individual components of working capital are two primary importance of working capital management.
1. Ratio Analysis:
Process of determining and analyzing numerical relationships in accordance to financial statements like balance sheets, income statements and cash inflow statements is known as ratio analysis. The primary purpose of ratio analysis is to appraise the operating and financial performance of an economic activity and determine its efficiency, profitability, liquidity and solvency. It also helps in getting a brief idea about comparative valuation by comparing ratios of different companies in the same sector.
2. Inventory Management:
Inventory management has huge importance of working capital management, it involves overseeing the purchase of new items and managing the existing ones. It aims to create such a purchase plan that will ensure effective delivery of materials. Two most used inventory management strategies are ‘Just-in-Time Method’ and ‘Material Required Planning.’ In former one the firm plans to receive items at the time of need rather than maintaining high inventory levels, and the latter one is based sales forecasts.
3. Cash Management:
Cash management is process of collecting, managing and utilizing the cash inflow to optimize the short-term financial stability. The key component in accomplishing this task is solvency as an importance of working capital management. Successful cash management is useful when any unexpected demand for cash occurs unexpectedly.
These importance of working capital management will assist you in maintaining optimum inventory level. Also you can build your strategies and techniques to clear aged inventories, improve working capital, generate cash and much more. Your steps towards significance of working capital management will definitely improve your brand loyalty as well as profitability for your organization.
- Tutorial Course - Basics of Working Capital Management for Beginners
» e-Learning Chapter 1: What is Working Capital Management
» Currently Reading: Importance of Working Capital Management
» e-Learning Chapter 3: Objectives of Working Capital Management
» e-Learning Chapter 4: Types of Working Capital
» e-Learning Chapter 5: Components of Working Capital Management
» e-Learning Chapter 6: Working Capital Cycle
» e-Learning Chapter 7: Working Capital Finance
» e-Learning Chapter 8: Net Working Capital
» e-Learning Chapter 9: Working Capital Requirement
» e-Learning Chapter 10: Working Capital Management Quiz For Beginners