Importance of Capital in a Business

Farhana Farooq

April 8, 2020 Perspective

Capital is just like milk without ice-cream, you cannot go forward without a streaming capital flowing in your business. Monetary value has a lot of importance in the development of a business, so an entrepreneur has to be sure about its capital sources. The importance of working capital will help you mostly designating to paying the employees their salaries, business development, new future prospects, inventory, and what not! In short, working capital should have the most attention from an entrepreneur. New businesses/start-ups usually have a risk involved in the whole funding process. Investors aren’t eager to incur the costs of a new business, but it all depends on the creativity of your idea and the benefits it’ll bring to others.

Let’s understand what capital actually is. It is classified into five categories; financial, natural, produced, social, and human. The major four financial capitals are debt, equity, trading, and capital. All of these capitals are important for sustaining a business. The best working capital management would be something that’s best for both days to day expenses and long-term health for the business. Without capital, a business cannot carry out its day to day operations. The owner would not have to go asking others if the business faces any sort of risk. A flourishing capital will help the business run daily necessities without any hindrance. The day-to-day operation of a business usually requires an amount of cash to carry routine tasks, cover costs, purchase goods, and material needed.

Working capital management

Working capital management decisions include determining revenue collection, debt management, inventory management, payment to suppliers. A running business or a start-up, both cannot afford the suppliers to stop supplying goods and materials. Now, this can be of any size, but to make sure suppliers are working on a track, a regular, weekly, or monthly expenditure is required which is a part of capital management. This is how the business will run efficiently and smoothly.

Goal of working capital

The goal of working capital management is to be essential as a strong accounting strategy with a focus on the maintenance of a sufficient balance between a company’s current assets and liabilities of a business. An effective working capital management system helps businesses not only cover their financial obligations but also boost their earnings. Managing working capital means managing inventories, cash, accounts payable and accounts receivable. An efficient working capital management system often uses key performance ratios, such as the working capital ratio, the inventory turnover ratio, and the collection ratio to help identify areas that require focus in order to maintain liquidity and profitability.

A team of excellent professionals will be required to make sure the whole working capital management is working evenly. They will make sure there is an adequate amount of operational efficiency throughout, smoothly running operations, bettering the company’s profits and earnings, strong contingency plan funding, and a steady and stable account receivable and accounts payable transactions. Mainly, a capital will ensure there is enough room for expansions and growth of the business.

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