Why is Working Capital Management Necessary for Your Business?


It is impossible to overstate the significance of working capital management to your company. One of the best indicators of a company’s health is how its working capital is managed. But what exactly is working capital? Working capital, which includes items on your balance sheet like cash, unpaid invoices, existing inventory, current accounts payables, and liabilities, is, in a nutshell, the difference between your company’s available assets and liabilities. That sounds easy enough. 

However, how do all of these various components combine to form the centre of working capital management?

What Is Working Capital Management? 

Working capital management is the difference between the current assets and liabilities of your business, which are cash, inventory, and accounts receivables as well as short-term loans, accrued liabilities, and accounts payable. It must be closely watched to maintain a healthy cash flow, and when managed properly, it can raise the profitability of your business. In actuality, it concerns the cash conversion cycle, or the time needed to convert inventory into sales, collect a payment, and reimburse vendors.

In other words, the difference between your company’s current assets and current liabilities is what makes up your working capital.

Types of Working Capital Management Ratios

There are two additional ratios you should be aware of to stay on top of things:

  • Inventory turnover ratio: This ratio is calculated by dividing the average inventory costs for a given period by the cost of goods sold (COGS) for that same period. Inventory management and understanding your inventory turnover ratio can help you better understand whether or not you are moving inventory, which can lead to cash flow problems. This is because inventories and supply chains can fluctuate over a year.
  • Collection ratio: Calculate your collection ratio by multiplying the average amount of outstanding accounts receivables by the number of days in an accounting period. Once that is calculated, divide it by the total net credit sales for that accounting period. The outcome of the calculation gives you a clear understanding of how effectively your company manages its accounts receivables and how long it typically takes to get paid after issuing an invoice.

Importance of Working Capital Management

There is much more to effective working capital management than just corporate speaking. Working capital management is crucial to your company’s success and how customers perceive you. In other words, do you have good management or are you in danger of going bankrupt?

Your company’s growth and overall operational viability are directly related to how effectively you manage your working capital. More than just having cash on hand and running a financially sound business are important aspects of positive working capital. It all depends on how you spend that money and, particularly, how you make the most of your assets.

When working capital management is done well, it ensures that your company has the cash flow it needs to pay for all of its short-term obligations, including bills and other obligations, as well as to cover its daily operating expenses. It also helps to support the expansion of your company.

The best way to convert receivables into working capital

Your company needs to optimize working capital effectively. But how can small and medium-sized businesses (SMBs) generate more working capital in a world where it seems like everyone is trying to put off paying you as long as they can? Of course, this is in addition to having a firm grasp of the significance of working capital management.

Your accounts receivables’ most important element is your current invoices. They can be used as collateral to secure additional working capital for your company and to forecast cash flow. You are already aware of how challenging it can be to get paid for slow-paying invoices. Your invoices can be funded within days with the help of an invoice funding partner like FundThrough.

What Advantages Does Working Capital Management Offer?

You can keep a balance and have a direct impact on profitability, liquidity, and growth with good financial management, especially when it comes to working capital management.

Effective working capital management includes keeping track of your inventory, accounts receivable, and accounts payable to ensure the smooth operation of your company.

To make sure you have the liquid assets required to run your day-to-day operations, it also takes maintaining both your short-term assets and liabilities. That’s because most small businesses typically have limited liquidity or assets that can be quickly converted into cash. Many businesses find it difficult to finance their operations in the interim between providing a good or service and getting paid.

If you want to keep the lights on and expand your business, you must have a firm understanding of the significance of working capital management.


The only way to expand a business is to operate with positive working capital and to make sure cash flow is always positive, efficient working capital management is essential. The management of working capital and ready access to it are the two most crucial requirements for a business. It is typical to use short-term financing options when creating a plan for working capital improvement.

In light of this, service-based companies should think about how much working capital they will require for ongoing operations under the new tax rate. This will assist them in preparing for the changeover and ensuring that they have access to the necessary resources.

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