Many at times, businesses find themselves in a fix where they cannot meet their short term financial obligations due to delayed payments or slow-moving stock.
Working capital is defined as the amount of capital needed to carry on a business – regardless of size. By calculating your working capital, you able to understand something much deeper: your liquidity. With this measurement, you can make an accurate assumption on the efficiency and financial stability of your company.
So why is working capital important to any business: Besides the fact that understanding your working capital needs can provide you with great insight on your company’s financial health, strong working capital management can enable you to propel your business forward.
When you maintain a certain level of working capital, you can not only successfully pay off your short-term expenses and debts – which in most cases are paid in cash, but you can also pick and choose the right money to set aside for investing in your future.
Some of the top reasons why you might need working capital to keep your business moving are as follows:
Controlling the components of working capital is key to managing your working capital requirements for your business. Having too little WC (working capital) impairs a company’s ability to meet its financial obligations. It is hard to pay expenses or debts when they fall due.
WC can be adjusted by increasing or decreasing its two components: Current Assets (CA) and Current Liabilities(CL). Increasing CA or decreasing CL increases WC. Management can enact several policies to improve the WC situation of a business as follows:
By adjusting these four primary influencers on Current Assets and Current Liabilities, management can change WC to a desirable level.
Cash is king and much effort should go to maintaining a business’s working capital needs at optimal levels for smooth business operations.