Relationship Between Working Capital management and Financial Performance

Relationship Between Working Capital management and Financial Performance

Only with proficient working capital management and robust monitoring and planning of current assets and liabilities can business professionals yield the financial performance of their enterprises or companies.

The financial performance of a business is directly proportional to working capital management. Working capital is a business’s driving force that determines the firm’s potential to adhere to short-term financial liabilities. The outcome of financial planning is reflected in the company’s return on assets, accounting profitability, and more.

Ways to manage working capital management for better financial performance

Government data states that nearly 6000 businesses registered under the MSME ministry have closed down during FY22. About 3,638 companies were shut in the first three months of 2022, and the reason can be attributed to the shortage of proper infrastructure and working capital.

There are several ways by which business professionals can manage their working capital requirements efficiently, ensuring the smooth functioning of business and a high return on investment:

  • Manage inventory: The most effective way to manage and obtain a high working capital is by enhancing the inventory turnover cycles, reducing investing unnecessarily in inventory, avoiding stockpiling, etc. Checking inventory in regular intervals helps manage optimum stock level, helping one dodge company risks like loss in sales, thereby enhancing the firm’s overall financial performance.
  • Enhance receivable process: Individuals should integrate a good collection system to ensure a shorter receivable period. Several established firms have found it easy to manage working capital by adopting an electronically advanced invoice system. It helps accelerate billing and collection, thereby minimising the cash conversion cycle.
  • Pay vendors timely: As per analysis, integrating payment discipline has improved working capital management. Firms that maintain a timely payment schedule with the vendors have the upper hand in negotiating better deals and discounts, helping them save on expenses and maintain healthy working capital.
  • Manage the debtors: Another way business persons can ensure adequate working capital is by ensuring that payments come on time. Not assessing credit terms with debtors is one of the mistakes to avoid when managing working capital for a business, as it might interrupt the company’s overall cash flow. Moreover, individuals should incorporate a thorough credit check to curtail bad debts.           
  • Scout for alternative funding choice: Business professionals can conveniently opt for a business loan to better working capital management and enhance the working potential of the firm.

Availing a business loan as an effective working capital finance option helps individuals access lump sum loan amounts without pledging any collateral. Business loan not only helps individuals boost working capital it also helps them in procure new inventory, expand a business, clear debts, etc. To reap all the benefits of this line of credit, business professionals must tick the important checklist before applying for a business loan.

However, individuals need to know how much capital they need to ensure the smooth functioning of the business. In this context, one should know how to calculate working capital requirements for a business.

Depending on business loan requisite, value and periodicity, business professionals can look for different types of working capital.

Moreover,  business persons can enjoy the lucrative benefits of exclusive pre-approved offers extended by leading financial institutions like Bajaj Finserv. These offers, available on a wide range of financial products like business loans, personal loans, credit cards, etc., help streamline the loan application process. Intending individuals can check their pre-approved offers by submitting their names and contact details.

To sum up, working capital management significantly impacts a business’s financial liquidity, growth, and profitability. It is a metric that determines a business’s financial stability and efficiency.