Growing Importance of Working Capital Management
As businesses are expanding into new horizons it is seen that working capital requirements becomes a huge factor and very often start affecting the running of the business. The working capital shortages are present even in highly profit making companies.
The main importance of adequate working capital are:
-Funds are required for the day to day business transactions and operations.
-The profitability from the fixed assets can be increased only with working capital. Ex: The productivity of the machine is affected when there is no raw material.
-The solvency of the company is in the short term is determined by working capital.
-For the efficient investing of the funds efficient working capital management is required. It helps in the efficiency of both long term and short term assets and thus improves the performance of the company.
-Managing liquidity and profitability. There is an inverse relation between liquidity and profitability and to ensure higher profitability working capital management is highly essential.
-Increase of activity level can be achieved only with the help of working capital and with the higher activity level will higher growth rate can also be achieved.
Is working Capital the villain of your business?
If yes then the few techniques that you can use are:
1. Budgeting tools should be use efficiently to understand the cash flow and necessary actions can be take accordingly.
2. Credit Policy should be drawn in a way that helps in generating a positive cash flow.
3. Centralization of accounts receivables and payables which helps in focusing the attention on specialized group for speedy recovery.
4. Risk Evaluation technique helps to access the risk and then later help us to either contain or eliminate the risk.
5. Online Banking , E-commerce etc are other venues that business can use so that the cash is received at the earliest.
If the company is in a exponential growth stage the working capital requirement is huge. If these are not managed properly it can affect the credibility of the business .
So how do you overcome this problem?