Working Capital – The Basics to Know

Whatever the business having a steady cash flow is vital. If the cash is not easily available when required by the business, it affects the growth and leads to opportunities being lost.  Contrastingly, if there is excess capital it could be tangled in the stock of the business.  That is why it is of utmost importance that the management of working capital needs to be the foremost priority to get the balance right between cash availability and working capital.

Working capital can be defined as the money any business requires for its daily financial needs and the ability to function successfully. Some of the areas it is needed are employee salaries, getting new stock, supplier payment and maintenance overheads etc.  As per accounting, working capital is the difference between current assets and current liabilities.

Importance

It is crucial for all businesses and reflects a company’s ability to operate successfully and efficiently on a day-to-day basis. If there is a shortfall of working capital, it will affect the successful functioning of a company leading to financial issues in managing daily expenditure.

Factors that influence Working Capital:

  • Inventories
  • Receivables
  • Payables

Any debts that are owed to a company directly affect its working capital, so it is vital for a business to ensure the cash flow is sufficient so that there is no payment receivables gap. Likewise, the inventory must be maintained at the correct level so as not to have an impact on the working capital. Having an excess of stock makes a business vulnerable with no payment received for the stock. Payables such as creditors impact the working capital as delaying payments to suppliers could lead to long-term strains on cash flow putting pressure on the working capital.

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