Why You Need to Manage Your Working Capital and Cash Flow

If you’re a business owner, it’s important for you to appreciate the importance of having working capital. This is the money that your business uses to function. Without it or without enough of it, then you’ll soon have to shut down your business. Even if your business seems thriving, it is bound to fail if it lacks the ability to settle its short-term debts on time. For this reason, it’s imperative that you know how to manage your working capital and cash flow.

Most of the time, working capital management strategies involve taking out a loan and using the money to finance the business growth and development. Of course, to be eligible for loans, your business’s credit worthiness needs to be investigated. If it turns out to be good, then financial institutions will be inclined to lend you money.

Credit worthiness is based on two main factors: what you have for collateral and how liquid your business is. These are reflected in your bookkeeping. They’re determined by looking at the difference between your assets and liabilities. This shows how capable you are of paying off a loan. Assets include cash, inventory, accounts receivable, as well as marketable securities. Liabilities, on the other hand, are accrued expenses, accounts payable, and near-term portion of loan due.

The relationship between your assets and liabilities should be managed well to make sure that you can continue your operation with sufficient cash flow to take care of your expenses and short-term debts. If you’re able to easily convert assets into cash, then you know that you’re managing your assets and liabilities just fine. As expected, having more assets than liabilities means better liquidity.

Nonetheless, it can’t be helped in many situations that there are periods when a business is doing fine but is cash poor. That’s just the nature of the business cycle. You start out with cash, which buys raw materials, which is then converted into product, which is then sold assigning you an account receivable, which should eventually turn into cash again. It goes without saying that you want a short business cycle.

Oftentimes, the way to free up your working capital and cash flow is to take out a loan or find another funding or finance option. If you want to expand or if further investment is necessary for timely growth, getting a loan will allow you to free up your cash.

Smart management of your business’s money contributes greatly to your chances of success. For this reason, make sure that you always have working capital and that your cash flow is consistent. Check this to know more about working capital and cash flow.