Why Working Capital Management Is Important For Business?: The importance of working capital has its origin in an era where industries had a close relationship with agriculture. The processors bought the fall harvest, processed it and then sold it to the market as a finished product. Bank loans were used whose maximum maturities were of one calendar year that served to finance the costs related to the purchase of the raw material and the processing of the same, which were cancelled with the sale of the finished products.
Why Working Capital Management Is Important For Business?
It can be said that the importance of working capital is an investment that the company makes in realizable assets in the short term, such as cash, marketable securities, accounts receivable and inventories. For Net working capital, we refer to current assets less current liabilities, including bank loans, commercial paper, salaries, and accumulated taxes. If the assets are greater than the liabilities, net working capital results, where the company carries out its operating base. However, some companies that have a predictable cash flow can operate with negative working capital.
Proper administration of working capital will be essential, and even more so because in certain companies they represent more than half of its total assets. A company that operates with certain efficiency needs to supervise and control accounts receivable and inventories. If a company is in frank growth, its control is necessary because the investments made can easily be left out of the supervision area. The management of working capital requires an understanding of the interrelationships produced between current assets and current liabilities. It is usually used to measure the financial risk due to the insolvency that the company may present, which is why the more solvent the organization is, the less likely it is to not comply with the debts incurred.
Specifically, it focuses its objectives on showing the key points in the management of Working Capital, because it is this that largely measures the level of solvency while ensuring a reasonable safety margin for the expectations of Managers and administrators. So it is necessary to achieve maximum efficiency in the same to ensure the long-term success of the company, thus achieving its total objective. For these reasons, companies begin to attach importance to the dynamics of their Working Capital and the behaviour of its structure, controlling the undue increase in accounts and receivables, accounts payable and inventories; elements that affect entities with greater sensitivity.
To determine the correct form or the optimal level of current assets, management must take into account the interaction between profitability and risk. Generally, it is said that the higher the risk, the greater the return; This is based on the administration of Working Capital at the point that profitability is calculated by profits after expenses against the risk determined by the insolvency that the company may have to pay its obligations. A concept that is gaining strength right now is the way to obtain and increase profits. The theory indicates that to obtain an increase in these, there are two essential forms; the first, increasing revenue through sales; secondly, reducing costs by paying less for raw materials, salaries, or services provided.
This postulate is essential to understand how the relationship between profitability and risk joins that of effective management and execution of Working Capital. The insolvency of the company is usually used as a risk measure, the more solvent or liquid it is, the less likely it is that it will not be able to meet its debts at the time of maturity. For information on Why Working Capital Management Is Important For Business you can also take help from any expert like Brian Paes Braga. Brian Paes-Braga serves as the President, Chief Executive Officer & Director at Lithium X Energy Corp.