Not only is working capital necessary for a company to meet its expenses and pursue growth, but it also helps tell the story of the financial health of the business. As a brief review, working capital is what a company has left after deducting liabilities from assets. However, the assets must be liquid enough that a business can sell them right away to obtain the funds it needs. It should be a top goal of any organization to always have enough capital on hand to meet its immediate needs.
Reasons Positive Working Capital is So Important
Liquidity is one of the prime reasons it’s so important for businesses to have positive capital. This puts the owner or managers of the business in a position to seize opportunities that arise as well as meet unexpected costs such as structural damage from severe weather. Additionally, working capital gives companies greater flexibility and control to invest in new products or services and get them on the market before their competitors do. It can also provide an important safety net when vendors are slow to pay outstanding invoices.
Increased profits are another important benefit of paying attention to capital and ensuring that it’s always on the positive side. However, this can only happen when a company’s accounts payable and accounts receivable departments are operating at peak efficiency. Accounts payable needs to stay on top of outstanding invoices and pay them on time. This allows them to take advantage of early-pay discounts offered by many businesses. Accounts receivable needs to track invoices through the pay cycle and contact customers immediately when payment becomes late.
Aim for a Healthy Balance
Although positive working capital is essential for business success, having too much on hand means the business isn’t growing as it should. If you find yourself stuck trying to find a happy medium, please schedule an appointment with Integrity Financial Capital for assistance.