Questions Business and Entrepreneurship

What is working capital management and how does it work?

Airtract

Wahid Bhai

Grow through what you go through

Every company has fixed financial management and working strategy team. The main objective of this team is to monitor the company’s accounts and financing strategies. Now, financial and account strategies are not a small process and need a lot of operations. Working capital management is the key procedure when it comes to the company’s management of accounting and financial strategies. This procedure is based on the two backbones- assets and liabilities. Every year a company needs to submit its financial record and take over as per the rule of the Government. Working capital management determines how much assets and liabilities the company is drawing currently so that the efficiency and smooth operations can be proved. A successful company will always remain in a condition which has a sufficient amount of cash flow during any immediate needs or short term operations. Moreover, debt and debentures will also record to be zero. All these procedures are managed through working capital management. 

You have already learned that the current assets, liabilities and sufficient cash flow determines the efficiency and best working operations of the company. Working capital management works on 5 core components. If all these components are monitored and checked from time to time, the possibility of a smooth financial and accounting system can be expected.

1. Accounts Receivable

As the name suggests, Accounts receivable refers to those amounts or dues which are about to be received by the company either from their customers, or partners or clients. These are collections which are required to be tracked and made on time through efficient accounting and transactions. Accounts receivable cannot be considered as the present asset if they are not collected in the form of either cash or other mode of transactions.

2. Accounts Payable

Accounts payable is just the opposite to accounts receivable as here the company is liable to pay back the dues or debts or loan amounts to the respective organization or statutory body. This plays a great role in working capital management. If the company makes delay in paying out the amount or not maintaining a proper balance sheet to monitor over it, then there may be a question on the asset and liability management. 

3. Inventory

These are current assets which are kept on increasing through the generation of revenues. The sales team is an important part of increasing revenue. The annual inventory turnout is a positive indicator towards a strong operation of a company as well.

4. Accrued Expenses

These are periodical documented balance sheet account expenses which indicated the current liabilities of a company.

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