Question

Discuss the methods a business could use to improve the management of working capital.
Word Limit: 450 words [12]

Answer 1

Working Capital

Working Capital is the capital used for the day to day transactions of the business organizations. Working Capital helps to maintain the liquidity of the business. Working Capital is important to take advantage of business opportunities, and corrective action for resolving the various threats. Working Capital is an important tool to protect the business from unforeseen liabilities. In other words, working capital is the difference between Current assets(Stock, Cash, and Bank, Inventory, Current Investment, Debtors, Bill Receivable, etc. ) and current liabilities(Outstanding Expenses, Creditors, Bill Payables, etc.)

Working Capital = Current Assets - Current Liabilities.

Methods to improve the Management of Working Capital.

Working Capital Management is the strategy of the business to maintaining the short term financial strength of the organizations for the effective utilization of the funds. Working Capital Management helps in monitoring the business transaction gap like payment & receiving, inventory management, etc. In short, managing working capital is helps the business to balance between risk and returns. Let's understand the methods to improve the management of working capital.

1. Reduce Gap between Receivable And Payable Accounts: It is common that every business purchases something on credit and sell their goods and service on credit. But Business needs to maintain the optimum level of both Receivable And Payable which helps to manage the liquidity and working capital.

2. Timely Resolve Issues of Customer and Supplier: Resolving the issues and queries of the customer helps to collect the cash and increase sales. Similarly, resolving supplier complaints and queries to take advantage of the credit. Both Play important for business success and working capital management.

3. Management of Inventory: Inventory is the most costly part of the production process if the business is able to manage and understand the requirement of the inventory, it will help to reduce wastage. That helps the buiness to improve liquidity and working capital optimum level.

4. Critical Analysis Expenses: Business Expenses play a significant role to improve the working capital of the business. Business needs to prepare the list of expenses into two parts mandatory and useless. That helps to eliminate unnecessary expenses and improve working capital and liquidity.

5. Maintain Ideal Current Ratio: The current ratio is proportionate relation between current assets and current liability, the ideal current ratio is 2:1. Maintaining a 2:1 Current ratio of the business means currents always twice than current liability which helps to improve the working capital management.

In short, we conclude that the effective management of working capital by the optimum level of the current assets and current liabilities. It helps the business to maintain the liquidity and profitability for the buiness and minimize the chance of risk in the business.

All the very best, take care.