What is the Working Capital Cycle and Why Must it be Managed

What is Working Capital Cycle and Why Must it be Managed

Working capital is one of the most vital components to make your business run without any hindrance. The working capital cycle makes a clear report about your company’s financial status. There are a few important things we need to know about working capital.

Key Points about Working Capital

  • The initial expenditure for your startup affects your working capital.
  • Also, if you are planning to expand your business, then your extra expenses will definitely affect your working capital.
  • With your business expanding, and you make more and more profits, the working capital will definitely increase and the sum of it will become much more in every working cycle.
  • If something unfortunate happens as if you face a great loss in your business ventures, then the first thing that will be hit is your working capital. It will decrease by a certain amount, and you will need to work hard and make more profit to overcome the losses.

So, as your working capital is like the backbone of your company finance, you need to keep it updated and also need to think about the profit you will get per cycle. You can always take help of any kind of Finance advisor about this matter.

Factors determining Working Capital

Working Capital is a very important component to run your business smoothly. The shorter life cycle a working capital has, the better it is for you. It means that in order to make your business stronger, it would be advisable to turn your net current assets and liabilities in cash, as soon as you can.

How to shorten the life cycle of working capital

In order to shorten the life cycle of the working capital, you would need to know what effects the life cycle as a whole. The first thing that affects the time period of the working capital is the initial stage when the firm is starting to operate. The next thing is when the firm is in the operational phase and then when your business gets a whole new opportunity and finally when your business is going through a turmoil.  All of these phases have an impact on the time period of the working capital. Now that you know it let’s see what can cause the working capital cycle to shorten,

  • Decreasing the period of credit by offering discounts on cash payment by the customers.
  • You can offer an easy method of payment so as that you can receive money timely.

Simple Difference Between Capital Management and Working Capital Management

Working capital management involves the regulation and maintaining of a balance between two billing periods and managing the business finances in such a manner that even during the slow seasons, all basic aspects of the business are taken care of. There is a time when your products and services are sold but the money has not come in yet and how to manage your capital during that interim period is all about working capital management. One can take a working capital term loan to meet the financial requirement in this period. Capital management is simply managing your business finances for the entire business year in every aspect of the business.

Capital management involves smoothly managing your business funds for a whole year taking into account costs, overheads, expansion related expenditure, marketing, and promotional funding and so on. These are milestones which are set at the beginning of every financial year and the company operates accordingly. On the other hand, working capital management is the maintenance of reserves in a way which enables you to keep things running and take care of daily expenses even when you are facing delays in getting revenues. This is the basic difference between working capital management and capital management in the most intrinsic sense.

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