Working capital is one of the most important factors in any company’s success. Defined as the difference between current assets and current liabilities, working capital is the amount that can be spent to benefit a company at any given time. For example, you might spend working capital (in the form of cash on hand) to upgrade equipment, purchase inventory, or pay employees.
The importance of working capital cannot be overstated. Simply put, without working capital your company cannot stay afloat, even if you are turning a profit. While it’s critical to generate working capital, perhaps even more critical is understanding what to do with it. Enter working capital management, the main topic of this blog. We are going to break down:
What is meant by working capital management
The importance of working capital management
Benefits of working capital management
Types of working capital management
Working capital management means, on the most basic level, a strategy used in business to ensure a company is operating efficiently to create and use cash on hand (a.k.a. working capital). The objectives of working capital management are to:
Understand the current/expected expenses (liabilities), current/expected revenue earned (assets), and the difference between the two (working capital).
Use the difference between assets and liabilities in the most beneficial ways.
Step 2 also includes the goal of using current working capital to generate more working capital. Working capital operates in a cycle of:
more revenue generation
and so on. So, what is the importance of working capital management? By managing working capital effectively, a company sets itself up to optimize the working capital cycle. In return, it reaps several benefits, all of which improve the current and future financial health of the business.
There are several benefits to working capital management. Some of them include Ensured liquidity, uninterrupted operations, enhanced profitability, improved financial health, and value addition.
You might think that turning a profit would be enough to keep a business afloat financially. That is actually not true. Cash flow, i.e. working capital, is one of the more important factors to whether or not a business is able to cover all of its expenses. Cash on hand is used to cover short-term debts and operational costs. A good working capital management strategy will monitor accounts receivable, accounts payable, stock, and debt management to make sure that there is always sufficient cash on hand.
Working capital management is understanding where working capital is coming from, where it should be going, and how much there is. With the information that working capital management provides, decision-makers within a company can implement policies or initiatives that are in the best interest of the business. Altogether, that works to mitigate interruptions in operations, such as delays in collecting accounts receivables or production bottlenecks.
Improving operating efficiency also increases long-term profitability. With proper working capital management, there would be timely revenue collection, intentional use of working capital to scale, and a deliberate investment strategy.
One of the main goals of working capital management is to understand cash in and cash out of a business. With that information in mind, then a company can decide how they define “proper” cash allocation. There should be enough cash on hand to pay any short-term debt, enabling the company to stay financially solvent and out of legal trouble.
Ultimately, all of working capital management contributes to value addition i.e. increasing the value of a company. Short-term liquidity, seamless operations, long-term profitability, and overall financial health all inherently increase the value of a company. They also make it easier to add value in other forms, like securing investments or purchasing capital assets.
At Backd we understand that small to medium size businesses (SMBs) are the foundation of our economy. We also know there are all sorts of scenarios when you might require an influx of working capital. Maybe you’ve fallen on tough times or maybe you are reinvesting everything into the company and have little cash on hand. Regardless of why you need working capital, Backd is here to help with fast alternative financing options. We offer short-term financing to get you cash in hand in a matter of days.
All you need to secure your money is:
More than a year of operating
A personal credit score of 600 or higher
A minimum annual revenue of $300,000 or more
10 months of deposits in your bank account
After all the qualifications are met and the application is filled out, the team at Backd handles the rest. Apply today!