Working capital management, or WCM, is how an organisation monitors and utilises its current assets and current liabilities. The main objective of WCM is to ensure the business maintains sufficient cash flow to fulfil its immediate operating costs and any existing short-term debt obligations.
Efficient management of working capital helps an organisation maintain its everyday operations efficiently and improves its revenue and profitability. It is an important aspect of any business as WCM is the key determining factor of their success.
Current estimates show that more than 75% of the companies across the globe suffer from poor management of working capital cycle that greatly affects business growth. Many business experts believe that these companies, especially the small and medium scale enterprises, would become significantly more profitable if they learn proper working capital management tips for their business.
There are several reasons how efficient management of a business’ working capital determines its success; let’s take a look at some of the most important ones.
- It contributes to the investment portfolio –
Sound working capital management acts as a source of extra funds as it releases the stuck-up capital for investing in existing programs and helps maximise returns. Businesses can create a wider investment portfolio that will help them secure more clients in future. It is one of the key reasons how an organisation’s success can be affected with proper WCM.
- Helps secure more profit –
Businesses can save a significant amount of money by properly managing their working capital. For example, it can help manage short-term liabilities more efficiently and save money by cutting down unnecessary expenses. They can also increase their profitability by re-investing the funds to provide more finance for existing projects. It can improve overall profitability and initiate growth as businesses manage their capital more efficiently.
- It prevents overtrading –
Proper working capital management can prevent businesses from overtrading, and avoid mismatching assets and finances. Overtrading is one of the primary reasons why businesses fail; once it exceeds its financial goals and objectives, it starts accumulating losses that drain the organisation’s resources. Managing working capital can prevent misjudging the current liabilities, assets and efficiently manage the funds to pay for overhead expenses.
Companies with a skewed asset and finance ratio can avail a business loan and collect the necessary funds to boost their organisation’s working capital. Several financial institutions offer such credits to businesses. Companies like Bajaj Finserv offers loans of up to Rs. 30 Lakh that can provide the necessary financial backing to initiate growth and increase profitability.
- Help get a better insight into the financial status of an organisation –
Proper working capital cycle management can provide a clear insight into the financial state of an organisation. Experts can analyse the details and understand whether all its assets are providing an optimum return or not, and identify any idle resource that negatively affects a company’s finances. Preventing underutilisation is an important feature that companies with sound working capital managing techniques benefit from.
Managing working capital can help businesses balance all its resources to maximise productivity and efficiency. It is an important metric to measure business performance and success and can affect an organisation’s growth significantly during its lifetime.