The working company must pay suppliers in days but collect receivables from customers in days therefore the working capital cycle is days. During this day, the company must meet its daily operating expenses through short-term borrowing, which will attract certain interest. This results in additional costs, reducing the company's profits. With a shorter working capital cycle, the company will have free cash to fund expenses without having to rely on loans. A business's available cash flow indicates how efficiently it manages its balance sheet and generates free cash.
It is relatively costly for small businesses to raise capital in a short period of time therefore, it is important for them to hold large cash reserves. Businesses often suffer from Fax Lists poor cash flow management and end up in debt, . It is important for business managers and treasurers to focus on the organization's short-term financial planning to manage future cash balances. For an in-depth look at cash budgeting and financial planning, visit our small business financial modeling course. If you are a business manager or wish to become an entrepreneur, it is essential that you understand working capital management and its relevance to achieving business efficiencies.
You first need to understand the industry you are in or will be in and know how much working capital you need. It's not just about managing cash flow from operations, but also about keeping sufficient reserves to meet maturing short-term debt and impending expenses. You also need to keep in mind that the financial decisions you make regarding capital investment opportunities and short-term funding strategies can affect your working capital and cash balance. What is the optimal level of working capital If working capital is too high, then your business has leftover funds that cannot earn any returns unless invested in short-term securities, etc. If working capital is too low, then your business is threatened with financial difficulties, which will not send a positive signal to the market.