Managing a business is not a piece of cake. Having enough cash and ample business knowledge might provide a good start and foundation for starting it, but all of this is not enough to keep your business running successfully. You need to be well aware of working capital management.
What is Working Capital Management (WCM)?
It is a business strategy specially designed to keep a business flourishing by utilizing as well as monitoring current assets and liabilities. It means that the business should not only focus on using all the available resources for further production and investment, by monitoring their current assets for support in difficult times.
Why is Working Capital Management Important?
Uncertainties and unexpected issues are an inevitable part of the business world. However, sufficient cash and resources are necessary to meet the daily requirement and keep the business running. Working capital management is critical so the business owners can stay well prepared for the future while managing the present in the best manner.
Digging deeper into this article will help you explore a comprehensive guide about working capital management.
Top 6 Components of Working Capital Management (WCM)
Working capital management means using the available resources in the best possible manner. It is one of the best strategies that can help any organization increase its earnings and profitability. However, the only condition is that it should be utilized efficiently. Before doing that, knowing about its components in detail is critical.
Here are the top components of working capital management every business person or organization should know about.
1. Cash Management
Cash flow is the backbone of any business. Every business requires an ample cash balance to meet the routine expenses, as well as the raw material for production. If there is not enough cash in hand, the production can suffer due to which sales and profitability can get affected. Therefore, most business organizations hire bookkeeping and accounting firms in Dubai to ensure proper cash management and not get getting short on cash balance due to any issue.
2. Receivables Management
The second component of WCM is receivables management. Receivables are what keep a business organization flourishing and successful. Business organizations introduce a number of ways to ensure proper receivable management from their clients and consumers. Without this, the organization would not be able to receive the profits and draw enough cash for routine expenses.
3. Inventory Management
Inventory management is another critical component of working capital management. It is critical to ensure that there are enough products in the inventory to meet the cycles of demand and supply. In addition to it, inventory management is also critical for WCM to ensure that out-of-demand products are not being lined up in the inventory as it will only increase the production budget while limiting the sales and profitability.
4. Accounts Payable Management
The next component of working capital management is accounts payable management. Just like accounts receivable management, accounts payable management is also critical. If a business organization does not clear its payable accounts, the vendors and suppliers offering their services might contact its competitors and cause loss by collaborating with them. Most importantly, poor accounts payable management can negatively impact business operations and reputation.
5. Liquidity Management
Liquidity management is another important component of WCM. Having enough cash in hand is necessary to meet the business requirements. On the other hand, if there is enough cash in hand without proper usage, it negatively impacts business operations. Having too much cash means that the business is short on opportunities or avenues to utilize their cash, which can lead to loss of production and profitability.
6. Short-Term Debt Management
The last but most crucial component is short-term debt management. Having too much cash and not having enough cash are equally important issues. However, a fairly neglected issue is not having enough cash on time. At times, business organizations get limited-time opportunities to maximize their profits, which they often lose due to improper short-term debt management. You can hire bookkeeping and accounting firms in Dubai to properly manage your short-term debt, as well as pay proper attention to working capital management, so you do not suffer in critical times.
Pay attention to working capital management!
Sticking to the same old and simple practices of business is not suitable in this modern era. The competition has increased fiercely, and to survive that, relying on professionals is inevitable. If you are too busy in business dealings to pay attention to accounts and books, it might cost you heftily. So, contact the professionals now before it’s too late and ensure that all your practices are aligned with the modern-day principles and practices of doing business and maximizing your profits.