The role of working capital management in a small business
Working capital, also known as circulating capital, refers to the difference between current assets and current liabilities on the day the balance sheet is drawn up. It is also a representation of the net investment in current assets necessary to support the day-to-day operations. Working capital ensures that a small business can continue with its activities, as well as meet short-term debt and upcoming operational expenses.
What are the signs of a healthy cash flow statement for your small business?
Working capital management is essential to the success of every small business. Businesses that run at a loss would be more liquid and profitable if they had the knowledge and implementation of efficient working capital management. The concept refers to a system that helps to ensure that tied down capital is released and put into productive uses. Working capital management is vital to a small business for the following reasons:
1. Increase investment portfolio
When funds are discharged through a functional working capital management system, they act as a cheap source of financing for the expansion of projects or investment. The return on investment (ROI) on currently invested assets should outweigh the average cost of capital to attain wealth maximization.
2. Mitigation of cost of capital
Working capital management strives to minimize the cost of capital, which is the cost of maintaining the working capital. The costs involved in maintaining a healthy level of working capital are carefully negotiated, monitored and managed.
3. Increased profitability
One of the primary objectives of working capital management is increasing the profitability of a business. One of the ways of growing the profit margin is by saving the financial costs payable for managing current liabilities.
4. Maintaining the smooth operating cycle of working capital
The operating cycle refers to the whole period of operation of a business. Smooth operation of the operating cycle is crucial for the proper functioning of a small business. From the acquisition of raw materials to the production and delivery of the finished products, working capital management ensures that the processes run smoothly.
5. Solidify the going concern
It is not uncommon for a very profitable company to go out of business if it is unable to keep up with the short-term financial requirements. For a company to remain in business and be competitive, it must satisfy both its short and medium-term obligations, which is only possible through working capital management.
Managing Small Business Cash Flow is Simple... With this Tip!
Without proper working capital management, a business is likely to fail. If your small business is short of adequate working capital, it is time to seek expert advice on how to improve the financial status of your business. Talk to us at LVRG today for guidance on how to manage your working capital, or click below to apply now.