You can afford to lose cash, but you don’t want to run out of cash. If unfortunately you run out of cash, you can’t pay for the expenses such as inventory, utility bills or sometimes the payrolls of your employees. This is the case where capital management is necessary for you.
Generally the assets and liabilities management is one of the most important things for business owners. Small businesses particularly should drive a perfect balance between the assets and liabilities to effectively carry on their daily operations, as they don’t have the capital to take up large losses. Appropriate working capital management is required to avoid any bankruptcy. The relationship between bankruptcy and working capital needs a clarification of the related term.
Working capital is the difference between your business’ current assets and liabilities. Generally your current assets consist of cash on hand and any assets the company expects to convert to cash in a year, specifically inventory and accounts receivable. And the current liabilities are your business’ bills that should be paid within a year, with possibly most important of those being accounts payable. Businesses plan for effective working capital – more current assets as compared to current liabilities – as it indicates more cash should be coming in as compared to going out.
Balance The Assets And Liabilities
Capital management involves the balancing process of the requirements of short-term assets and short-term liabilities. The working capital management includes short-term funding, products purchased on credit, products and services furnished on credit and merchandise, products and services paid for upon delivery.
Handling the working capital basically involves cash flow management of a business on a daily, weekly and even monthly basis in such a way that satisfies all the debts at the same time reserving sufficient capital to carry on operations and the profits generation.
Turn Assets Into Cash
Some of the current assets are more liquid as compared to others – which mean that these assets are easier to turn into cash. The accounts receivable liquidity depends on how punctual your customers are in making their payments. Inventory liquidity depends on sales. Two small businesses with the same amount of fine working capital on paper could be in very different financial positions in case one has lots of cash accessible at the same time when others have so much unpaid customer bills and a stockroom full of inventory that no one needs to buy.
Clear Debts To Avoid Bankruptcy
Businesses experience bankruptcy while insufficient capital resources prevent them from paying debts owed. Effective working capital management allows a business to pay its all debts as they mature, at the same time when continuing profitable business operations. At least, effective capital management allows a business to break even. Consequently, capital management is directly responsible for the avoidance of bankruptcy. Ineffective capital management can lead you to bankruptcy.
Actually capital management is cash flow management. Anyone in your business, who deals with the components of working capital, should be in the loop regarding the outcomes of bringing in lots of cash. For instance, employees who observe unsold objects accumulating or who have to turn away customers looking for sold-out objects should understand these as risks to the business’ overall health. Employees dealing with outgoing bills should know which of them should be paid now and which of them can wait for weeks.
Strategies To Improve Capital Management
There are several strategies of improving your cash flow and setting an effective working capital management. Strategies of improving your working capital management start with simple things such as keeping an eye on the overall expenses and potential debts daily, weekly and monthly and making plans in advance on how to balance them. Reducing the production expenses while managing the sales revenue increases profits, accordingly presenting more cash for capital management. Short-term working capital management issues can be solved by exchanging short-term debt for long-term debt and allocating cash for short-term debt into the profit generation for paying off long-term debt.
In current financial system, the need to have a highly rationalized and efficient procurement and inventory management is important for the business’ overall success. Procurement and inventory management function in any business has to make certain below listed important deliverables:
- It supports the well timed procurement of quality-assured products in adequate quantities
- You also can get cost efficiencies in procurement and supply management activities
- By inventory management, you can make sure the consistency and security of distribution systems
- It enables the monitoring of all procurement and supply management activities
Improve The Receivables Process
In case you want to reduce the receivables period, the company needs to have an excellent collection system in place. One critical thing of working capital is to release invoices as quickly as possible. Companies should go over invoicing practices to put off incompetence that can be causing delays in sending invoices to debtors. It’s additionally important to make sure that the invoices are accurate before they are sent to debtors to keep away from delays in getting paid.