In order for any business to run smoothly, the people involved must be able to monitor the financial assets and liabilities that the company is exposed to on a daily business. After all, if you have no idea what’s happening with your working capital, it’s difficult to determine whether your business is healthy, or heading for destruction. Because working capital has a direct impact on the financial health of a business, keeping track of the numbers can help you to make crucial decisions that are essential to the management of good cash flow.
Businesses, both small and large, need to be able to strike a balance between managing assets and liabilities if they want to continue operations, because most simply don’t have the ability to absorb large losses. The more time you spend monitoring working capital, the more likely you are to be able to avoid serious issues such as bankruptcy in the future of your business.
What is Working Capital?
Working capital, in basic terms, is the difference between all of the short-term assets, and short-term liabilities held by a business. It acts as the cash that is available for use during the day-to-day operations of a basis, and can include things like the sale of merchandise, while excluding money used to pay liabilities.
Obviously, working capital can be defined as a daily necessity for most businesses, as companies require ongoing access to a regular amount of cash so as to make routine payments, cover any unexpected costs, and purchase the materials and resources required for the delivery of goods and services. If your working capital begins to suffer, then the chances are that the liquidity and efficiency of your company will begin to struggle too. In other words, the working capital of your business is a vital system that needs to be constantly monitored to ensure efficiency.
Importantly, it’s worth remembering that healthy working capital for one company may not be the same as healthy capital for another. This because there is a significant difference between companies in matters such as payment policies, collection, and the timing of asset purchases.
Working Capital and Cash Flow Health
Ideally, when you’re checking on your working capital with your bookkeeper through a system such as Xero, your aim should be to find that you end up with a positive amount of capital after liabilities have been subtracted. If the number is positive, this can be an indication that you are in a good position to pay off temporary loans, on the other hand, negative working capital may be a sign that you need to adjust your budgeting efforts, or seek out alternative help.
Positive working capital can also have a good impact on your cash flow by helping you to earn the interest of investors and outside parties who are more willing to offer cash and support to a company that seems to have control over its financial status. Unfortunately for struggling business, working capital acts as a good indicator of how financially manageable your business is when you’re trying to deal with partners and investors. The healthier you are, the more desirable your business becomes.
The Importance of Managing Working Capital
Failing to watch over your working capital could mean that you cannot prevent a disaster from happening. When a company doesn’t have enough working capital available to cover the obligations that already exist, this can lead to problems such as financial insolvency and legal trouble, as well as liquidation of assets, and even bankruptcy.
With the help of a bookkeeper and accounting software like Xero, you can focus on maintaining a sufficient balance between your liabilities and assets that maintains the good health of your business and allows your company to thrive. The healthier your finances are, the more you should be able to avoid problems that occur in the future of your business, and even take advantage of opportunities for growth that might present themselves.
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