Working Capital’s Four Main Components Explained
Working capital management refers to the techniques and practices designed to control current liabilities and assets. Simply put, it is the function which involves efficient and effective use of the components of both current liabilities and current assets to reduce the total cost. Many ask “what are the 4 main components of working capital?” Here they are.
Cash is an important component of a business’s current assets and is required for pulling off business activities. That makes it essential for a business to keep adequate cash balance at all times. A finance manager has to match the cash inflows and outflows so as to hold on to adequate cash.
Accounts Receivables Management
Accounts receivable is any claim for amounts owed by customers to a business. These are debts that arise from sale in the ordinary course of business. Those who owe money to it are referred to as debtors.
Stock constitutes one significant part of the total working capital. Efficient inventory management leads to the maximization of shareholders’ earnings and consists of managing a couple of conflicting objectives. These objectives are the minimization of investments in stock and maintenance of smooth raw material flow. So, a finance manager has to work out the level of stock where these two conflicting business interests are reconciled.
Accounts Payable Management
Payable management is extremely closely associated with cash management. When done effectively, it results in a steady supply of raw materials to a business and enhances its reputation.