Importance, Components, and Benefits
Developing or gaining more assets and liabilities for your company is good. But do you know, there are plenty of businesses out there who are losing or unable to grow because of a lack of proper management of their assets and liabilities.
What should one do in such situations?
Well, investing in working capital management is the answer.
With the help of working capital management, you would develop business strategies that operate your working capital, like assets and liabilities, for the best possible results.
Here in this post, we will look at what is working capital management, how it works, and everything you need to know about it.
What is Working Capital Management?
Working capital management keeps track of two important things with the help of which our business can grow and stay in business. First, with the help of working capital management, you would be able to develop the kind of activities that make sure you have enough resources for the business's day-to-day operating expenses.
Along with that, these management strategies help your business productively investing your resources.
Understanding Working Capital
We are talking about working capital management, and in the coming section, we will be looking at the types of working capital.
But before that, let's understand what working capital is?
In general, working capital is the difference between a company's assets and current liabilities. Under the assets thing, you can include cash, receivables, and inventories.
Hence on the other hand, in liabilities, you can include short-term borrowings, accrued liabilities, and more.
Why Do You Need To Invest In Working Capital Management?
We as business owners are afraid of losing our company's existence, and lacking the proper resources for a good working of your business is one of the major reasons because you can lose your company's existence.
Hence, if you want to ensure that your company has appropriate resources for working on daily activities and that too long term, this can help you offer a long-term existence.
We can protect our company and ensure proper resources with the help of working capital management services.
Here are some problems that you can tackle with the use of working capital management:
- Low availability of cash
- Uncontrollable credit policies
- Limited access to financing services
- Liquidation of the company
Although there are more such problems that you can work on, the above-mentioned are some of the major ones.
Types Of Working Capital Management
There are various types of working capital, and based on its type, you would be able to pick up the right services for you. Hence, this will help you pick up the right business strategy for your business growth.
But for that, you need to know which type of working capital you need to work on. So let us have a look at different types of working capital:
1. Working capital
The first type of working capital is temporary working capital required during a specific time of the year for the business. If you want some examples regarding temporary working capital, then that would be like festive capital used by a business during the festival season only.
This is considered temporary working capital because it does not have a fixed value, and it keeps on changing based on market and business results.
In this case, you won't have to work throughout the year to generate a huge fund for temporary working capital.
2. Permanent working capital
The next type of working capital is permanent working capital which is the amount of money required to make liability payments. In other words, we can also call this working capital the operating cycle, with the help of which you can carry on with the business processes.
This is the minimum working capital required to run your business smoothly. Hence, it is considered a permanent option, and business owners should make sure to keep this or fulfil this working capital on a priority basis.
3. Gross & Networking capital
Gross working capital is considered as the total of a company's assets. Thus, gross working capital assets are cash, accounts receivable, stocks, and short-term investments.
4. Negative working capital
Whenever there is a shortfall in a company, that is considered as negative working capital. However, when the negative working capital is managed properly, then it can become a way to fund your business growth in sales with others money.
5. Reserve working capital
The next type of working capital is reserve working capital. The major reason behind developing such working capital is that businesses can use it during unexpected market situations.
With the help of such working capital, you would be able to move forward with your business processes when you don't have an actual cash flow through your customers.
This is one of the most crucial working capital that every business should have.
6. Regular working capital
This is the minimum working capital that a business needs to run its business and daily operations. It is also defined as the least amount of capital required to run your business.
The regular working capital is used to make payments like your employees' salaries, overhead expenses, and more.
7. Seasonal working capital
There are some situations or a particular time when your business would require more than a certain amount of capital, which is fulfilled or considered seasonal working capital.
This working capital is most used by businesses that only enhance their growth speed in a particular season. For example, the umbrella business enhances its speed during the rainy season.
8. Special working capital
When businesses want to maximise their business efficiency, they keep a special working capital to use during such situations. With the help of this working capital, you would get funds for finance marketing campaigns, unforeseen events, and more.
Factors That Affect Working Capital Management:
You all must be knowing that the needs of working capital management for every business are not the same; there are two types of factors that affect working capital management.
Let us have a look at those factors:
- The first one is endogenous factors that include company size and the strategies they use.
- The second type is exogenous factors which include the level of interest rates, type of industry, products, services, and more.
How Is Working Capital Calculated?
If you want to calculate a company's working capital, you need to subtract current liabilities from current assets.
Working Capital = Current assets + Current liabilities
Importance Of Working Capital Management
The greatest importance of working capital management is how successful your business is and how people view your business. There are two types of companies, successful companies and bankruptcy companies. With the help of working capital management, you would never face bankruptcy issues with your company.
With the help of working capital management services, you would ensure efficient cash flow, which will fulfil all your business requirements and operational activities.
Working Capital Management Solutions
Companies nowadays are using a wide range of working capital management solutions. Some of those solutions are electronic invoicing, cash flow forecasting, supply chain finance, dynamic discounting, flexible funding, and many more.
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Q. Can we manage the working capital on our own?
Ans. If you have proper knowledge of financial studies and can easily manage all the processes, you should go for it. Although doing something and getting things done by someone experienced are two very different things.
So we will prefer to get in touch with someone experienced who can easily handle the working capital management services.
Q. Do we need to know what kind of working capital we face before getting working capital management services?
Ans. That is completely your choice; in most cases, people go for complete working capital management services under which the service providers handle every type of working capital.
If you think you are facing management issues with a specific type of working capital, you can go for specific working capital management services.
Q. Do we need working capital management services just for once or throughout our business journey?
Ans. We need working capital management services throughout our business journey. You can even get working capital management strategies for your business. Still, under various circumstances, you would have to make changes in those strategies that an experienced person can only do.