The ultimate goal of every business is to make a profit, with a good source of bringing in the money required on a frequent basis, without having to face any surprises of capital crunch while the business is booming. Being a part of the total capital employed in the business it is often termed in the financial parlance as the difference between the short-term liabilities and assets, indicating how high the liquidity of cash and cash equivalent resources is to run the business successfully.
Why is it important?
Many businesses often falter in achieving a high liquidity ratio, indicating the inefficient management skills in handling the capital requirements for the short-term period. The inflow and outflow of cash are very tight for small businesses as the exposure of their operations is not as high and frequent as bigger operational companies, and the internal cash generation is extremely important and necessary for their survival. With good cash management techniques, owners inject the amount of capital required and keep some additional cash in the business to free up from the debts and fund additional business expansion or projects which could be profitable
With an efficient working capital the business can:
- manage the payables and receivables in the most efficient manner to increase the profitability
- the return on the capital of business with a good liquidity, to their shareholders, are high for investors who have pooled in or hold shares in the business
- the business is healthy and so is the credit profile, which financial institutions look while lending
- the cash management also becomes effective once the high liquidity of the business is reached, the dependence of external source of financing is reduced once it is effective
- with a good and healthy liquidity ratio, the value of the business is high as the cash management is done without any hassles
- competition can be well faced if they have the good working capital capacity to withstand discounts and offers to stay at the best in their business
- in case of additional funding required banks will be willing to fund only if the business has a good healthy working capital ratio
- Since parables are well managed the production remains uninterrupted, with goods reaching the clients on time.
The better way to handle the funding requirements of the business taking the time, money and factoring the responsibilities, for investing in the future of the business is important and not an overnight goal seeking to be achieved.