Why you should manage your Working Capital
Before you can start any business or company, capital is being needed. Capital is broad but there's what is termed as working capital. I remember when I wanted to venture into cryptocurrency trading and I had no prior knowledge. So, I needed money to first pay and learn the basics and needed knowledge. Secondly, I also needed cash for the actual crypto trading business. Both are capital if you ask me but the later is what could be termed as working capital.
Working capital is that initial funds required to start a business and it is what keeps the business alive. Without a working capital, there can't be any business and when you have this working capital, it is very important you manage and utilize it appropriately. Losing your working capital is more or less being out of business. And gathering funds all over again could be very difficult.
Personally, there was a time I lost my working capital while doing futures trading. It was so frustrating and it took me quite some time to recover and be back in the business. The loss I experienced could be attributed to some bad and wrong calls I made. So, it is important to ensure that your working capital is always secured. Yes! Losses will come in business but do your best not lose your working capital. It is the life of any business.
With respect to firms, management of working capital is concerned about the management decisions on a firm's current assets and its current liabilities. Current assets, by their very nature, are changing daily, if not hourly, and managerial decisions must be made. The management of firm's or individual's working capital is a very important aspect of the overall financial management.
More so, current assets must be large enough to cover current liabilities to ensure a reasonable margin of safety as well as maintaining an acceptable level of net working capital. Also, current assets should account for more than 50 percent of assets while current liabilities should be about 30 percent of total financing. Hence, increase assets and reduce liabilities.
In a firm, major current assets include cash, marketable securities, accounts receivable and inventories. While current liabilities are accounts payable, notes payable, accruals wages, rent, interests, taxes etc. In all, they must be managed so as not to keep too high a level of each while maintaining firm's liquidity.
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Hi @tomlee, could you give some working examples, please?
It seems to me the principles apply just as much to an individual or a household as it does to a firm.
Yeah! The principles apply to both individuals and households. Buy more of assets than you spend on liabilities. To also manage funds at home well, when buying stuffs, go for the quality ones that'll be durable!
Okay, but I'm just trying to think about this. Let's say a house worth £100k, with a mortgage of £30k and a net (salaried) income of £20k pa ...what kind of scenarios would that create?
Thanks for this excellent contribution. The working capital is the backbone of any trade related business. Not like fixed assets, it can easily slip away if not properly managed.
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One needs to make decisions that will always keep his working capital safe.
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i know many times working capital save my ass from falling hard
You just have to be careful then
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