Working capital is the money a business has available to run its day-to-day operations. A sufficient amount of working capital is needed for the business to operate smoothly.
Itβs also worth noting that businesses should aim to use their working capital as efficiently as possible. In this guide, weβll look at working capital management strategies to help your business use its assets productively, and get maximum return on investment.
Working capital management (WCM) is the process of managing your short-term assets and liabilities so your business has enough money to meet expenses without holding onto excess cash. The goal is to strike a balance between your current assets (such as inventory, cash, and accounts receivable) and current liabilities (such as short-term debt and accounts payable) so your business runs at optimal efficiency.Β
Key areas of working capital management include:
Another term you might encounter is βworking capital cycleβ, which refers to the length of time it takes for a business to convert its operational resources into cash. Working capital management, on the other hand, is the strategy behind this process.
There are several types of working capital, each showing a different aspect of how businesses manage cash flow and short-term assets. Understanding these areas can help you identify how much capital your business needs to operate smoothly and respond to change.
Key types of working capital include:
An effective working capital management strategy focuses on balancing cash flow, assets, and short-term liabilities to keep your business running smoothly. In this section, weβll explain how components such as accounts receivable, cash, and inventory can be managed to provide your business with an optimal level of working capital.
Inventory plays a key role in working capital management, as it directly affects both cash flow and day-to-day operations. Managing inventory efficiently means maintaining the right balance, like. not too much stock that ties up funds, and not so little that production or sales slow down.
Key inventory management techniques include:
Managing cash effectively helps ensure your business can meet payments on time without holding excessive funds that could be better invested elsewhere. The goal is to strike the right balance: enough cash to cover day-to-day operations, but not so much that cash sits idle.Β
To manage cash efficiently, you can:
Managing accounts receivable helps balance sales growth with the risk of bad debts. Businesses need to extend credit wiselyβenough to boost sales but not so much that payments are delayed or lost.Β
To manage receivables effectively, you can:
Intuit QuickBooks offers a range of features for small and mid-size businesses to help you manage finances across key areas, while scaling up. From cash flow to performance management, youβll have access to a range of metrics and data cues to assist with monthly to yearly tracking.Β
To get ahead of capital management strategies, alongside business growthβsign up and get started with Intuit QuickBooks in only a few simple steps.Β
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