Why Is Working Capital Management Important?
It serves as a financial metric for how a company is working and how stable it is money-wise in the short-term.
If a company lacks sufficient funds to cover its financial obligations, then it can lead to insolvency and legal issues, liquidation of assets, and even potential bankruptcy. Therefore, it is important to have adequate working capital management. It is basically an accounting strategy with an emphasis on maintaining a sufficient balance between current assets and current liabilities. When working capital management is effective, it helps companies cover their obligations and boost earnings.
Managing business working capital basically means managing cash, inventory, accounts receivable and accounts payable. An efficient management system uses key performance indicators, like its inventory turnover ratio, collection ratio, working capital ratio, etc to help discover areas that need focusing on maintaining both liquidity and profitability.
Working capital is also a prevalent financial metric for the liquidity, efficiency, and the overall health of an organization. It is a sign of the outcomes of many different activities, including debt management, revenue collection, payments to suppliers, and inventory management.