Importance of Working Capital Management

Significance of Working Capital Management - Importance of Working Capital - Importance of Working Capital Management - Wikipedia of Finance

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 in a firm vary from trade in business and corporate and they can even vary among alike businesses and organizations.

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 for corporates, businesses and organization in points. I helps to measure and maintain required balances to achieve a good working capital ratio of a company.

Improve Liquidity and Business Valuation

Significance of Working Capital Management - Importance of Working Capital - Importance of Working Capital Management - Wikipedia of Finance

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.

Increasing Profitability and Returns on Capital

Importance of working 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.

Boost Goodwill

The preservation of adequate operating capital aids the company in its efforts to improve its reputation. Businesses that have a solid working capital position are able to make timely and prompt payments on all of their outstanding debts.

These individuals are capable of meeting their short-term debt obligations and operating expenses on time. The prompt payment of all expenses contributes to the enhancement of the company’s reputation.

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.

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.

Payment of Dividends on Schedule

The efficient administration of working capital contributes to the regular payment of dividends to shareholders. In order for the organization to distribute dividends in a timely and orderly manner, it has to have adequate cash on hand. It contributes to gaining the confidence of shareholders and ensuring their satisfaction.

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.

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.

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.

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.

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3 thoughts on “Importance of Working Capital Management”

  1. I don’t know who you are but certainly you are going to a famous, I have read working capital management notes 😉 Cheers!

  2. Kumar Indrajeet Prasad

    I loved your artificial on WORKING CAPITAL. It is so brilliantly explained that i could understand it in easier way.

  3. Great internet site. Lots of helpful information here. I’m sending it to several friends ans also sharing in delicious. And certainly, thanks on the effort! A motivating discussion is worth comment. I believe that you have to publish more details on this subject. Thanks 🙂

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