What is Working Capital Management and Why Do Companies Need It?

What is Working Capital Management and Why Do Companies Need It?
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In a nutshell, working capital is what is left over after you subtract your current liabilities from your current assets and is the amount that fuels your company’s daily operations. It is used to measure your company’s efficiency and is an indicator of its financial stability. While it is important to know what your business’ working capital is, it is equally important to know how to manage it to boost your net revenue and ensure maximum productivity.

Take a detailed look at what working capital management is, and why you should be paying close attention to it.

What is working capital management?

Since working capital finances the everyday expenditure of your company, managing it is crucial. If you don’t have sufficient working capital, you won’t be able to run your business smoothly. As a result your profits will suffer.

Since working capital is related to current assets and current liabilities, it involves managing them efficiently. This means having a good system in place to collect payments from clients in a timely manner, ensuring that your inventory is sold quickly and increasing the time frame according to which you have to pay suppliers and vendors that you buy goods and services from. This will keep your working capital at optimum levels, so that you can enhance your business’ productivity, as well as its margins.

Why should you prioritise working capital management?

  1. To ensure that your business functions smoothly

Think of working capital as the oil that keeps each cog of your operations cycle running smoothly. For example, if you have a mill that processes lentils, working capital will help you lease a mill, buy raw gram, process it, pack it and dispatch it to various distributors. If you don’t have sufficient working capital for any one of these processes, your business will come to a halt, which will lower your ability to earn money, and cost you as you tackle unsold inventory.

If you find that your working capital is too low for your comfort, give it a boost with a working capital loan. Bajaj Finserv offers this loan to you at an affordable rate of interest and of a high value, up to Rs.30 lakh. Besides, you can access a working capital loan on a collateral-free basis, which makes it all the more convenient. When you make use of the handy pre-approved offers, you can access these funds in seconds and meet your working capital needs quickly.

 To ensure that you use your resources to their fullest potential

Overtrading is most certainly harmful for your business, but under trading is equally detrimental. Keeping a watch on your working capital situation can help you strike a balance between the two. You can ensure that your resources aren’t lying idle and that you aren’t losing out on income because of under trading.

  1. To evaluate the financial health of your company

How you manage your day-to-day operations is a good indicator of the average financial health of your company. If your working capital is adequate for a period of time, it indicates that you are making the right financial decisions for your firm. However, if you notice that your working capital is running low, or fluctuates greatly, it draws your attention to the finances of your business immediately, giving you ample time to rectify the situation if need be. To do this, monitor your business’ working capital ratios.

  1. To facilitate higher liquidity for your company

Working capital management will allow you to estimate the correct amount that you need for your business. Having too little will slow your company down, but having too much isn’t beneficial either. By blocking more money than you need in your working capital, you will compromise your business’ liquidity. For example, if you find that you need only Rs.1 lakh as working capital but you have Rs.1.5 lakh earmarked, you can use the extra Rs.50,000 to pay your vendors quicker, for instance. As a result, working capital management will allow you to amp up your liquidity and improve cash management too.

With these considerations in mind, be sure to give yourself ample time to evaluate your working capital periodically. It can bring to light any red flags that you may have missed and will give you enough time to take remedial measures.

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