Working capital management has an important role to play in the success of a business. Over 75% of companies that are running at a loss or struggling financially would be profitable and liquid if only the power of working capital management in releasing tied down capital that could otherwise be put to productive use are released. Many finance professionals of business organizations would prefer not to take the extra care in striving for optimum utilization of resources tied in working capital just because they only look at the work involved in carrying out proper working capital management exercise.
Working capital management is a strategic management tool that has the potential of guaranteeing long-term success. Activities like: cash management, accounts receivable management, accounts payable management, marketable securities management and accruals management are crucial responsibilities of financial managers that requires constant supervision from the CFO (Chief Financial Officer).
10 IMPORTANCE | BENEFITS AND USES OF WORKING CAPITAL MANAGEMENT
- EXPANSION OF INVESTMENT PORTFOLIO: funds released through sound working capital management practice acts as a cheap course of finance that can be used for expansion of existing projects or for investment in new investment opportunities.
- INCREASED PROFITABILITY: increasing profitability is one of the main objectives of engaging in working capital management. One of the ways of increasing profitability through adequate working capital management is in saving financing cost that would have otherwise been incurred but for managing short term assets and liabilities.
- ENSURE THE AVAILABILITY OF SUFFICIENT RESOURCES: through stock management which is a component of working capital management, a business is able to ensure that resources are sufficient at all times. Optimal stock level for instance is determined using some models outside the scope of this article.
- SOLIDIFIES THE GOING CONCERN STATUS OF A COMPANY: in business, it is very common to find a company that is profitable to go out of business if it cannot meet up with the immediate cash flow needs of its business. Businesses need to satisfy all its short term and medium term obligations in order to be in business and still remain competitive.
- IMPROVES OVERALL EFFICIENCY OF A COMPANY: the overall operational excellence of a company would be greatly improved when finances are managed in such a way that it poses no hindrance or obstacle to any aspect of an entity.
- HELPS A COMPANY AVOID OVERTRADING: overtrading is one of the fastest ways to business failure. The major symptom of overtrading is mismatching assets and finances. This includes uncontrolled, out of proportion business expansion.
- MAINTAIN GOOD RELATION WITH SUPPLIERS AND OTHER CREDITORS: trade creditors and other non-trade creditors are happy to continue doing business with an organization that has good internal structure of managing its resources – including working capital.
- AVOID UNDERUTILIZATION OF RESOURCES: in as much as overtrading is bad, under trading can cost a business a fortune in an unearned profit. Through proper management of working capital, a company can ensure that there are no idle resources.
- PROVIDES BETTER INSIGHT INTO THE TRUE FINANCIAL STATE OF A COMPANY: through working capital ratios, analysts and business valuation experts can gain better understanding of a business.
- ASSISTS MANAGEMENT IN CORRECTLY ALLOCATING THE RIGHT RESOURCES TO WHERE THEY ARE NEEDED THE MOST: through working capital analysis and other fundamental analysis, areas with surplus resources and shortage of resources are identified and using appropriate asset allocation technique, even distribution of resources would be achieved.
The business community and the world at large will almost certainly not have to worry about business failures and financial crisis if the resources tied in the form of working capital can be released for further creation of value. You will have every reason to be happy if you start repositioning your business today by establishing and maintain a culture of quality working capital management. Remember that the content of this article alone cannot guarantee complete business success, other business success factors needs to be rightly blended into your management function toolkit.