There Are So Many Reasons Why You Need Responsible Working Capital Management
If you’re in the business of business, you know that the lifeblood of any industry is capital. Capital can involve straight up money, but it also involves assets and personnel and all the things that are essential to the daily grind. It is absolutely vital to the well-being of a successful business that a balance between liquidity, profitability, and growth is struck.
Few things are more important for a business than responsible working capital management. While the phrase “working capital” can see a bit alien, the concept is easily understood when related to cost of living. An individual needs a certain amount of capital each day to function: he needs to pay rent, cover utilities, buy gasoline, buy food, deal with any unexpected problems that might come up, and perhaps buy a couple cups of coffee when the mood strikes him.
For individuals we typically consider this “responsible budgeting.” That is, you don’t want to spend your entire paycheck on a designer bag when you have rent due the next day. This concept is vitally important for businesses as well. It’s important to be able to manage inventory, payroll, accounts receivable, accounts payable, taxes, and investments. Managing all of these things well leads to business success.
A company that has poor capital management may find itself insolvent and this can lead to financial and legal troubles. Obviously, nobody goes into business to go bankrupt, but those who don’t practice responsible capital management often find themselves there.
Capital management helps you do a number of things:
- Pay employees on time;
- Ensure that your suppliers get paid promptly;
- Ensure that you are receiving payments on time;
- Help you figure out potential trouble spots, such as what customers may not be paying and what employees aren’t reaching their target goals.
Capital management doesn’t just mean paying attention to your own output: it means paying attention to your internal workings as well. Even things like updating technology or coming up with more efficient ways to accomplish tasks pays into capital management, as it helps you divert vital resources toward more profitable endeavors. People didn’t just adopt computers over typewriters because they look cool: it’s because they help people work faster than a typewriter ever could, and thus improves capital management!
Responsible capital management helps a business run smoother and generate more profit. It’s easily argued that the business of business is responsible working capital management.