Tuesday, 11 April 2017

The Management of Working Capital. Is it important?

The effective management of working capital can be critical to the survival of the business and it is hard to think of anything more important then that.

Many businesses that fail are profitable at the time of their failure and failure often comes as a surprise to the managers.

The reason for the failure is a shortage of working capital.

Furthermore, effective management of working capital is likely to improve profitability significantly.

The percentage return on capital employed increases as capital employed is reduced.

Effective management of working capital can reduce the capital employed.

It increases profits as well as enabling mangers to sleep soundly without worries.

The four largest elements affecting working capital are usually

  • debtors, 
  • stock, 
  • creditors and 
  • cash.

Success in managing the first three affect cash, which can be reinvested in the business or distributed.

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