Title: Working Capital Management Importance | Top 4 Reasons
Headings: Working Capital Management Importance
Working Capital Management Importance
Why is Working Capital Management Important?
Top Reasons for Working Capital Management
#1 – Improvement in the Credit Profile and Solvency of the Company
Example
#2 – Use of Fixed Assets Efficiently
Example
#3 – Ability to Face Crises
Example
#4 – Expansion
Example
Conclusion
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Content: The pre-requisite to the long-term solvency is the ability of the company to meet its short-term obligations. The adequate management of the working capital will help the business to pay all of its short-term obligations on a timely basis like the salary payment, payment against the purchase of the raw materials, and other such operating expenses of the company. Example
There is a company ABC Ltd. which pays all its loans, rent, and vendor bills on time; then this would increase the credit score of the company. This shows that how responsible management of the working capital can reward the company in the long-run. Once the company has a high credit score, then it will also qualify for the business loan at a lower rate, making it easier for the company to procure finances easily in the future and leading the business in good financial standing. #2 – Use of Fixed Assets Efficiently
Proper management of the working capital and availability of adequate working capital all the time will enable the company to effectively and efficiently use the fixed assets present. In case because of the unavailability or paucity of working capital, the fixed assets of the company remains idle then in that case also the depreciation has to be charged, and the interest on capital borrowed is to be paid on fixed assets, i.e., the company has to incur the fixed expenses on the fixed assets unnecessarily even though it is not using it. So, with the help of working capital management, fixed assets can also be managed and used in an effective manner. Example
There is a company ABC ltd which is manufacturing and selling the pens in the market.