Importance of Working Capital Management

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Meaning of Working Capital Management

Working capital management is a process of managing the working capital requirements of the organization for running smoothly. Working capital is simply the cash required for meeting daily expenses and for the operation of day to day activities. Working capital management involves the management of current assets and current liabilities to ensure optimum liquidity in business for its proper functioning. It mainly focuses on always maintaining sufficient cash in an organization to easily meet its short-term debts and operating expenses.

Working capital management aims at the economical procurement of working capital required and efficient utilization of that capital to derive better results. Working capital management performs ratio analysis of operating expenses key elements, Inventory turnover ratio, working capital ratio, and collection ratio. It aims at maintaining these three ratios at an optimum level which helps in the smooth functioning of the business.

Short Notes on Importance of Working Capital Management

  • It Increasing the liquidity and solvency position of the business.
  • It helps in the Maintenance of sufficient working capital.
  • It ensures continuous and smooth functioning of business operations.
  • It helps in paying regularly returns to shareholders.
  • Better working capital position improves the creditworthiness of organizations

Importance of Working Capital Management

Importance of working capital management
Importance of working capital management

Improves liquidity and Solvency Position

Working capital management helps in increasing the liquidity and solvency position of the business. Proper management of work capital enables timely payment of all short term debts as well as various operating expenses.

It ensures adequate investment of business capital in assets maintaining a proper ratio between current assets and current liabilities. This improves their cash management and maintains the proper liquidity of funds in business so that they are less dependent on external financing.

Ensures Uninterrupted Business Operations

Management of working capital ensures continuous and smooth functioning of business operations. It aims at maintaining an adequate amount of funds at every point of time in business. Business is getting their raw materials regularly by timely paying their supplier.

Timely payment of employees’ wages and salaries will motivate them to work regularly and also the business is able to meet their daily operating expenses timely with sufficient availability of funds. All this will lead to uninterrupted operations of the business.

Increase Profitability and Productivity

Working capital management improves the efficiency of organizations. It focuses on improving productivity and profitability. Management of working capital helps in managing the account payables and account receivables of the business. It helps in procuring required capital economically and utilizing it efficiently. This enables increasing the profitability of the organizations. 

Enhance Goodwill

Maintenance of adequate working capital helps the business in improving their goodwill. Businesses with the sound working capital position are able to make timely and prompt payments of all their outstanding bills. They are able to pay all their short term liabilities and operating expenses timely. Timely payment of all expenses helps in enhancing the reputation of the business. 

Improves Creditworthiness

A better working capital position increases the creditworthiness of organizations. Such an organization enjoys better solvency and good credit rating. They are easily able to raise funds from banks and financial institutions as per favorable terms.
It helps them in meeting all their additional capital requirements in case of expansion and diversification plans. 

Timely Payment of Dividends

Proper management of working capital helps in paying regularly returns to shareholders. The availability of sufficient funds helps the organization in a timely and orderly payment of dividends. It helps in gaining the confidence of shareholders and makes them happy.

Helps in Facing Contingencies

Every business faces certain contingencies in its course of operations. Maintenance of sufficient working capital helps in facing the expenses of unforeseen contingencies like seasonal fluctuations, depression, financial crisis occurring from huge losses, etc. They can easily overcome these unfavorable situations if sufficient funds are available and continue with their activities.