Definition of Working Capital Management Importance
Working capital management is the system developed by the management of the company to manage the net working capital of the company in such a way so that the working capital provides healthy working capital ratios and a better financial situation of the company for attracting potential investors as well as stakeholders.
Explanation
The working capital of a company could be defined as the excess of the current assets hold by the company over the current liabilities and debts of the company. Working capital management becomes the importance of the management of the company because the healthier working capital of the company shows that the company is in better position to handle the current obligations of the company and shows a reliable future scenario. The management of the working capital helps the company to track the live changes in the working capital as well as managing the effective current assets ratio over the current liabilities of the company and utilization of any over and above idol funds of the company for increasing the net performance of the company.
Importance of Working Capital Management
There are lots of the key importance of the working capital management for the company and some of them are as follows:
- The Management of the working capital of the company helps in maintaining the stability of the company. As we know that the working capital of the company insures the daily functioning of the business of the company by maintaining the healthy current assets over the current liabilities of the company. In this scenario the management of the working capital plays a crucial role as the negative working capital of a company may results into distrust in the stakeholders and can halt the continuation of the daily business activities.
- As the working capital includes two major financial part of a company – The Current Assets & The Current Liabilities, the management of the working capital extends to the management of the current assets and current liabilities of the company. In simple words, the management of the working capital also includes the management of the Accounts Payable, Accounts Receivables, cash & cash equivalents as well as the inventory management. All of these parts relate to the daily running of the business.
- The management of the above defined parts of the working capital can benefit the company’s performance. The management of the Accounts payable helps the company to make timely payments for the daily required purchases made by the company and enables the company to comply with any legislative rules and laws. In the same way, the management of the Accounts receivable and the cash & cash equivalents insures the collection of funds over the period and maintaining the proper balance for smoothly running of the business activities.
- The working capital management of the company enables the company to manage and maintain the adequate and sufficient amount of working capital for the company which also helps in the trustworthiness of the company’s performance and it helps the company in case the company requires sanction of some loans for its business projects or operation of the business. The assets hold by the company is also a basis for the sanction of the loan amount but the loan sanctioned on the basis of the net-working capital of the company increases the reputation of the company within the public and may even boost the market share of the company in case of a registered public company.
- The proper management of working capital also enables the company to identify the idle funds in case they are available and put them into good use for the benefit of the company. As the working capital insures the day to day running of the business, which helps in maintaining the healthy cash flow of the company with the relevant cash outflow within the company. As the shortage of cash is a deteriorating situation for the company but at the same time overflow of the cash, inflow is also not healthy for the company. The idle funds available with the company could be find during the evaluation of the working capital ratio of the company where the ratio of the current assets of the company and the current liabilities of the company are measured. The idle funds are not generating any returns to the company and in that case, the company can invest those funds in good investments and earn some good returns for the company or the same could be used in the expansion of the business further.
- The working capital management helps the company to track the regular changes in the working capital of the company. As the continuous increase in the working capital denotes that the funds of the company are blocked either in the investments or the accounts receivable which triggers the immediate action on recovery of the amount and putting the amount in the use of the business. Same the continuous decrease in the working capital denotes the continuing building up of liability and a relatively lower rate of increase in current assets which also triggers the event where the management of the company needs to look at the operating cycle of the business and maintain it.
Conclusion
The working capital of the company plays a big role in day to day running of the business as well as the long term running of the business. The increase in goodwill of the business through the proper management of the working capital of the company helps in the long run of the business as well as maintaining a good proportion in the market shares. The optimization of the working capital over the period of time increases the profitability of the business and helps in better functioning of business operations and helps in maintaining the core competitive advantage over the other companies. So the management of the working capital is necessary as it could either lead to success in the business in the future or bankruptcy in case of no proper management of the working capital.
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