Why Working Capital Management is Needed

In Financial Management, Working capital management is needed for all time liquidity of cash for growth of the business. If there is mis-management in it, it means, there will be difficult time to operate the business. Business will not pay its bill on time or buy its inventory and this ability will depend on your problem working capital management.

You know working capital is the excess of current assets over current liabilities. This excess capital must be managed and this excess must be all the time.



1. Efficiency in Business Operation

In working capital management, manager will take the decision how much cash and bank balance will keep to pay the bills on the time. To pay bills on the time is connected to the reputation of business.

If you have the business, you must have employees.

You must have the partners who will get share from your business profit in cash after certain time period.

You must have the creditors

You must buy the stock with cash. 

In better working capital management, have to make annual budget of all such payments.

In there is no provision of working capital out of total capital of business, business will fail. For example, you have big material but your 5 trucks need repair for sending material to distributor. Due to failure repair your truck (Lack of cash in business), your customer rejects the order and you will lose your sale opportunity. This shows, you estimate your working capital in less. If it is important for you, you have the reserve fund for all vehicle future payments.

If you have to get high performance in the business, you must keep extra fund in the form of working capital.

2. Better Inventory, debtor and Creditor Management 

In working capital management, you learns how to inventory management, how to debtor management and how to creditor management.

You have stock but no sale. Is it better inventory management. No because

you did not have fund to promote your products. In working capital management, you have to keep working capital for advertising expenses and other promotion expenses.

Your debtors are not paying you the money on the time. Did you take action. No because no money for legal spending. So, all legal expenses must have if you are taking working capital management seriously.

3. Help to Make Intelligent Business Person

If you have the knowledge of working capital management, you will become intelligent business person like hi tech computer.

You know working capital cycle and as per this cycle, you will keep good cash fund.

This cycle has divided into three parts

inventory cycle

debtor receiving cycle

creditor paying cycle.

If you will keep good balance on this cycle after learning working capital rules, you can ride your business with profit.


4. It will Save Your Business from Insolvency

Insolvency means no capacity to pay your debt with your all assets. If you will not pay the bills on the time, your goodwill asset will decrease. Yes, your fixed asset are more but if your current asset will always less than current liabilities, soon, you will see the bad name of your business in the world.

Remember all fixed assets have expenses which we pay from new sales. Your new sale will stop with your bad name and your business will reach insolvency level where your whole assets will less than your liabilities and you have to reach to court to pay your all liabilities. So, never under estimate the importance of working capital management. Manage it from beginning of the business.


Reference 

M.Com Finance Management Notes
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Accounting Education: Why Working Capital Management is Needed
Why Working Capital Management is Needed
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