Importance of Working Capital, Accountancy and Financial management Video Lecture | Accountancy and Financial Management - B Com

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today we are going to study importance
of working capital management
working capital is part of the total
capital employed by a company and is
often defined as the difference between
short-term liabilities and short-term
assets practically speaking it is the
cash required to run the daily weekly
and monthly operations of a business
working capital management is therefore
the process of managing the short-term
assets and liabilities so that a firm
has sufficient liquidity to run its
operation smoothly
importance of working capital management
our higher return on capital improved
credit profile and solvency higher
profitability higher liquidity increased
business value favorable financing
conditions
uninterrupted production ability to face
shocks and peak demand competitive
advantage
higher return on capital firms with
lower working capital will post a higher
return on capital so shareholders will
benefit from a higher return for every
dollar invested in the business improved
credit profile and solvency the ability
to meet short-term obligations is a
prerequisite to long term solvency and
often a good indication of
counterparties credit risk adequate
working capital management will allow a
business to pay on time its short-term
obligations which could include raw
materials salaries and other operating
expenses higher profitability according
to a research conducted by Tauranga and
a Japan Africa the management of account
payables and receivables is an important
driver of small business's profitability
higher liquidity a large amount of cash
can be tied up in working capital so a
company managing it efficiently could
benefit from additional liquidity and be
less dependent on external financing
this is especially important for smaller
businesses as they typically have a
limited access to external funding
sources increased business value firms
with more efficient working capital
management will generate more free cash
flows which will result in a higher
business valuation and enterprise value
favorable financing conditions a firm
with a good relationship with its trade
partners and paying its suppliers on
time will benefit from favorable
financing terms such as discount
payments from its suppliers and banking
partners
uninterrupted production a firm paying
its suppliers on time will also benefit
from a regular flow of raw materials
ensuring that the production remains
uninterrupted and clients receive their
goods on time ability to face shocks and
peak demand an efficient working capital
management will help a firm to survive
through a crisis or ramp up production
in case of an unexpectedly large order
competitive advantage firms with an
efficient supply chain will often be
able to sell their products at a
discount vs. similar firms with
inefficient sourcing
thank you please
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