Regardless the size of your business, working capital management is an essential aspect of assessing and evaluating the financial health of your firm.
Proper management of working capital should be a top list priority. This ensures that your company maintains a smooth cash flow for carrying out all short and long-term business activities.
What is working capital management?
Working capital is made up of business assets and liabilities. Therefore, working capital management can be defined as the way a business manages the relationship between those liabilities and assets for the long-term.
Additionally, working capital management can also refer to monitoring the day to day activities that ensure immediate debts are being settled in an efficient way. This includes receivables, payables, payroll, cash and inventory.
What are the benefits of working capital management?
Working capital, the cash flow required to run day to day business, has to be monitored closely in order for a business to operate smoothly. This type of management can bring numerous advantages to any business. Here are the top benefits:
1) Increased profits
Excellent management of accounts receivable and payable comes with many benefits that will help your business grow. By closely monitoring expenses, it’s possible there is some additional cash that can be saved on a monthly basis.
2) Improved liquidity
Since cash falls under working capital, managing it well will increase liquidity and minimize the level of dependency you may have on external financing. This is vital if you own a small business that pays bills from daily earnings. Therefore, managing working capital economically allows your company to allocate resources more effectively and improve cash management.
3) Positive financing conditions
If your business has a good relationship with its trade partners and it pays its suppliers on time, you are likely to have favorable financing conditions. For example, you can earn rewards from suppliers and banks. Additionally, these same suppliers and banks may be willing to extend credit when it's needed. Also, you will benefit from uninterrupted production ensuring that business is continuous.
4) Optimized working capital
In order to maximize working capital management, you can:
- Reduce business inventory
- Increase the length of the payable cycles
- Improve business cash flow and forecasting
- Collect receivables quickly
The Bottom Line
Following these tips will help you to optimize your business's working capital. Make it a point to create and follow strategies like these. Then, watch your business grow to the next level!