What Is Meant by Working Capital Management?
The working capital of a company basically consists of current liabilities and assets. Current assets are assets which can be converted to cash in one year. Current liabilities refer to the debts which a business incurs in its day-to-day operations. These could be outstanding expenses and credit purchases.
Are you wondering what is working capital management? It refers to the process of monitoring the components of a balance sheet concerning a company’s short-term liquidity. Two fundamental parameters which help a business better manage its working capital needs and indicate its liquidity standing are as follows.
Working Capital Ratio
This is a figure which signifies the ability of a company to pay off current liabilities using current assets. Investors often look for a business with a ratio of 2:1, which means that the company’s current assets are twice as big collectively as its current liabilities.
Collection Period Ratio
This ratio is suggestive of the ability of a company to convert debts into cash. The fewer days that business takes to realize the payments from debtors, the better things stand.
Solid working capital management helps a business in having better operational efficiency and therefore, higher profitability. A company generally seeks working capital business loans that will help meet its short-term cash flow needs smoothly.