Importance of Working Capital

Part of our Efficiency Ratios guide · 51 articles →

What is the Importance of Working Capital?

Working capital is very important because it helps business manage their day to day operations and make key investment decisions in such a way that they are never out of cash and don’t face liquidity issues.

Here are the top 8 reasons why working capital is important –

#1 – Liquidity Management

By properly analyzing the income, expenses and payables, the financial and accounting team of an enterprise can easily plan for their funds accordingly.

#2 – Out of Cash

Inappropriate management of day to day expenses may result in enterprise liquidity issues. Therefore, the planned management of working capital can avoid such a situation.

#3 – Helps in Decision Making

By correctly analyzing the requirement of funds for day to day operations, the finance team can appropriately manage the funds and can decide on available funds and the needed funds.

#4 – Addition in the Value of Business

Proper working capital management results in timely payment to the lenders, which creates goodwill in the market.

#5 – Helps in the Situation of Cash Crunches

By properly managing the liquid funds, one can help the organization avert any cash crunch and pay for its day to day expenses on a timely basis.

#6 – Perfect Investments Plans

Correctly managing the funds or working capital, the company can plan for their investments accordingly and maximize its return.

#7 – Helps in Earning Short Term Profits

Some enterprises keep a large buffer of funds as working capital, which is way over and above the required level of working capital. By correctly estimating the required working capital, the extra funds can be invested in other projects that may result in higher profits.

#8 – Strengthening the Work Culture of the Entity

Timely payment of all day to day expenses like the salary of the employees creates a good environment and motivates employees to work harder.

Video Explanation Of Working Capital