Working capital is defined as the cash flows you have available to spend on your company’s daily needs. Although you may have several types of capital, such as fixed, regular, temporary and reserved, all of these types are the result of your company’s purchases and revenues. These are reasons you should manage your capital.
Money for Daily Operations
If you have high expenses or have significant outstanding accounts receivable, you may have difficulty running your business. You may lack the cash flow to pay your employees’ salaries, purchase raw materials for your products or keep the lights on. Your business cycle needs to be efficient and quick, so there is little time between your expenses going out and revenue coming in. If you have several operating cycles, this process can have additional challenges.
Higher Credit Score
Proper management of your operational cycle ensures that you pay your bills on time because your company is well funded. As you pay your rent, vendors and loans on time, you increase your credit score. A higher score will help you secure future funding at reduced rates. Your company will be seen as a good risk because it is in good financial standing.
Emergency Preparedness
When you face an emergency, you often need cash to address the challenges and restore order to your company. Proper capital management allows you to save money for emergencies. This savings can be used for salaries, repairs, replacing raw materials or products or any other cost that your company incurs because of an event you hadn’t planned for.
The savings can also save you if you suddenly experience rampant growth or receive an unusually high number of orders from your customers. When you are able to get the supplies you need quickly, you can produce and deliver your products to your customers on time. You can also afford to secure temporary staff to address seasonal or unexpected order increases.
Increased Profitability
As you manage your working capital, you can identify what expenses are necessary and which ones can be cut. You can also analyze your operations cycle for bottlenecks or inefficiencies, which you can then fix through process adaptations. These changes can result in greater cash flow and a quicker turnaround, resulting in higher profits. You can then focus on expansion because your extra cash can be spent on new equipment, expanded marketing, hiring or software purchases.
Your supply chain will benefit as well, which will further lower your costs. Eventually, your cash management will give you a competitive advantage over your competitors. Through this advantage, your company gains production value and is more favorable to your customers, expanding your customer base.
When you manage your working capital properly, you can handle your day-to-day operations and prepare for the future.