In India, small and medium enterprises alone employ 40% of the total workforce. SMEs account for a large section of the nation’s economic growth, they comprise of future conglomerates. As such, they have much more direct requirements for multiple growth phases. Operating a business requires smooth cash flow and for this, understanding the relevance of working capital is vital for SMEs growth. To ensure that an enterprise is able to earn maximum revenue, working capital management becomes a vital concept.
Here is a list of benefits that an organisation can achieve by effective management of working capital.
Manageable business operations
With the implementation of proper capital management, a firm can keep a track on capital ratio, receivables ratio, etc. Prior to understanding these ratios assists operational managers in implementing processes accordingly. So, it can be called one of the significant tips to manage working capital for a firm.
Improves financial health
A firm can gain increase profit margins only if they achieve smooth working capital management goals. A vital element of capital management involves tracking of receivables. With proper allocation of cash, an enterprise is capable of meeting operational expenses thereby improving financial health.
Avail loan without much hassle
Companies often face issues while availing a financing without adequate market or capital reputation. Lenders won’t approve a loan unless they have an assurance of timely repayments. So, to avoid such situations, businesses need to manage cash flows effectively. A well-managed working capital optimises an organisation’s P/L statement and makes them more creditworthy. Thus, the chances of availing a business loan with favourable terms also increase multi-fold.
Upgrade operational system
Businesses have to upgrade their existing operations by upgrading their setup with new technologies, which require huge capital investment. A smooth working capital cycle helps in introducing hi-tech equipment that further develops their operational processes.
Working capital is the lifeblood of any organisation, and its smooth flow determines its success. An organisation is able to add more credibility in market by managing capital better, which in turn can help them to achieve a competitive edge.