Importance of Working Capital Essay

Importance of Working CapitalWorking capital (WC) is defined as the amount of cash that is needed for smooth and profitable business operations. Working capital is calculated as (WC= Current Assets minus (-) Current Liabilities). It is important that the working capital is maintained at positive level in order to ensure that the business runs effectively. Positive working capital helps to settle daily running expenses of the business as well as settle maturing short-range unpaid sums.

Working capital must be calculated accurately to avoid overestimations that may lead to collapse of the firm’s operations. Business operations may come to a stand still if working capital is negative. Working capital is managed through appropriate management of accounts receivable, inventories, cash and payable business amounts.Miscalculation of working capital may result in holding up some business transactions. It may severely affect the business to a level of closing some of the branches leading to a loss of customers and incredibility of the business. Some employees may be laid off in order to cut down operating cost, while payroll preparation may be done by outsourcing if the overall cost is cheaper.The most important thing to do in order to avoid miscalculations is to involve the management team in budget preparation since they have a wide knowledge on cash flows and receipts.

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Also one needs be realistic in drawing revenue forecasting so that revenue targets are set slightly lower for the trading period rather.A business needs to operate within minimal cost. In order to rectify lack of enough working capital minimize working capital through offering discounts on cash sale hence reduce commissions paid on credit cards. Inventories may be turned within short time. Stocking high demand goods gives more returns.

More so, ensuring well formulated credit rates with vendors and suppliers keeps working capital low. Business transaction records must be updated to avoid paying for wrongly delivered commodities.In conclusion, working capital should be kept as low as possible by making more cash sales, controlling cash flows, appropriate inventory managements and manning transaction closely.ReferencesFung, A., Hebb, T. & Roger J.

(2001). Working Capital: The Power of Labor’s Pension. New York: Cornell University Press.