Running a small business needs managing accounts receivables and meeting inventory requirements to manage capacity utilization. Lacking working capital can leave a business owner in trouble. A significant problem to the MSME sector is the timely inundation of working capital or adequate finance that enables the day-to-day running of business operations by allowing MSMEs to make short-term transactions. What can be done to make this situation better? Find below
What is Working Capital Management?
Working capital management is about managing current assets vs current liabilities. The more liquid a firm’s current assets, the better it can manage routine operations. It is helpful for all SME’s and organization to manage their finance through the help of working capital management. It is a business strategy created to ensure that a company functions smoothly by using its assets and liabilities to their best use.
Why is Working capital management important?
Working capital management affects consumers’ investments and disturbs long-term capital. Thus, an organization’s profit, or rate of return, is affected by imbalances in the working capital. A balanced working capital ratio is important for business success.
Over-investing in working capital plunges profitability as surplus funds can be used somewhere else. However, less working capital leads to financial insolvency and inadequate funds. An MSME must adopt an aggressive or approach to working capital management, which also gravely affects the utilization of an enterprise. Efficient working capital management will result in higher capacity utilization, which improves the work of the industry owners and job creation. Working capital issues also lead to tax hurdles, poor capacity utilization, disrupted planning, control, operations of inventory, salary payments and debt repayment. This also puts a challenge in attracting investments, thus halting growth. Holding an inappropriate balance of current assets and liabilities can have a far-reaching business impact.
Long operating cycles and billing on actuals make it difficult for small businesses to meet immediate financial needs. Working capital balances function as an indicator of operational capabilities and financial health. Good working capital management will result in profitability since it eases the pressure on the business to opt for unviable propositions, minimizes NPAs, and enhances creditworthiness in the market.
How to Manage Working Capital?
An effective working capital management plan brings strategic and financial advantages. One must keep in mind while framing an excellent working capital management plan is mentioned below:
- Understanding Working Capital
- Forecasting of Working Capital Requirements
- Inventory Management Techniques
- Financing your Working Capital Gap
- Limitations of A/R’s – Credit terms, Tools for Liquidation
Working capital management meaning is nothing but simply how the working capital of a business is managed. The significance of working capital management in an organization can never be undermined. Working capital management objectives include:
- Keeping the business’s liquidity intact.
- Enhancing operating efficiency.
- Decreasing implicit and explicit interest costs.
- Increasing the overall profitability of the business.