Role of working capital management in business success

Working capital management has an important role to play in the success of any business enterprise. Over 75% of companies that are running at loss or struggling financially would be profitable and liquid if were more disposed to the knowledge and practice of efficient working capital management. The working capital management system helps in ensuring that tied down capital that could otherwise be put to productive uses are released. Many finance professionals and business experts often ignore the importance of this management. They usually do not go the extra mile in striving for optimum utilization of resources tied to working capital just because they only look at the work involved in carrying out proper working capital management exercise.

Working capital management is an effective management technique tool that has the potential of guaranteeing long-term success. Indices such as: ‘cash management’, ‘accounts receivable management’, ‘accounts payable management’, ‘marketable securities management’, and ‘accruals management’, are crucial responsibilities of financial managers that require constant supervision from the CFO (Chief Financial Officer).

TEN IMPORTANCE/ BENEFITS AND USES OF WORKING CAPITAL MANAGEMENT

 1. Expansion of investment portfolio

Funds released through sound working capital management practices act as a cheap source of finance that can be used for expansion of existing projects or for investment in new spheres of investment.

2. Increased profitability

 Increasing profitability is one of the main objectives of engaging in working capital management. One of the ways of increasing profitability through adequate working capital management is in saving of financial cost that would have otherwise been incurred but for managing short-term assets and liabilities.

3. Ensure the availability of sufficient resources

Through stock management which is a component of working capital management, a business is able to ensure that resources are sufficient at all times. Optimal stock level, for instance, is determined using some models outside the scope of this article.

4. Solidifies the going concern status of a company

In business, it is very common to find a profitable company goes out of business if it fails to meet up with the short-term financial needs of the business. Businesses need to satisfy its short term and medium term obligations in order to be in business and still remain competitive.

 5.     Improves overall efficiency of a company

The overall operational excellence of a company would be greatly improved by an effective working capital management system. Where this system is in place, finances are managed in such a way that it poses no hindrance or obstacle to any aspect of the entity.

 6.     Helps a company avoid overtrading

Overtrading is one of the fastest ways to business failure. One main characteristic of overtrading is mismatching assets and finances. The business goes beyond set financial goals and objectives, and in the long run, it meets with ruin. Some trends signaling overtrading will include uncontrolled, out of proportion business expansion.

 7.     Maintain good relation with suppliers and other creditors

Where a business engages in the proper management of its working capital and other financial indices, Trade creditors and other non-trade creditors are poised to continue doing business with it. Their knowledge of the existence of this system goes a long way to boost their confidence in the business and their dealings.

 8.  Avoid underutilization of resources:

While we condemn overtrading and tag it as a negative impact on the functionality of the business, we must also reiterate that under trading can cost a business a fortune in an unearned profit. Through proper management of working capital, a company can ensure that there are no idle resources.

9.  Provides better insight into the true financial state of a company:

Through working capitals ratios, analysts and financial experts can gain a better understanding of a business. The working capital management affords the business the opportunity of taking a closer look at all of its financial indices.

 10.  Allocation of resources:

Management of working capital is essential in the allocation of resources. It assists the business management incorrectly allocating the right resources to appropriate quarters. Applying the ratios revealed upon the utilization of the management system, as well as all other necessary analysis, areas with surplus resources and the shortage of resources are identified and followed swiftly with appropriate even distribution of resources to all.

Managing working capital is synonymous with efficiently managing other resources in the business. Other financial indices are considered such as the ratios of turnover, the ration of the collection, the ration of key performance. All of these can only be effectively achieved by a standard, efficient and state of the art management of working capital.