Formulating a business and successfully taking it through the years can be a challenge. Business is not very easy unless you understand the complete financial requisites from the right point of view. Not alone knowing the fact a business should gain profits you need to know how to gain such profits and what could be the components in a company’s financial position.
One such interesting component which covers the important essentials of a positive business structure is “a working Capital”. This can be quickly defined as a difference between the current assets and current liabilities. The current assets need to be in a short-term liquidity state and current liabilities also should be focused on timely debt payment capability. Hence the working capital is the lifeblood of any business.
Some effective tools to analyze this working capital are discussed for a better understanding and to manage the working capital. They are
Cash flow statement:
The company should maintain the data pertaining to the statement of cash transactions during a week, maintained in a spreadsheet which shows the amount of cash which has been utilized for any business purpose and all the cash details, for examples cash sales will happen on a longer time basis and current liabilities will be paid off in shorter periods of time. This difference of time can hinder the working capital management and its efficiency in business. Hence maintain details of cash flows can be helpful to the company.
this is another interesting factor which affects the working capital efficiency. Inventory means stock in financial terms. It derives as a division of the cost of sold goods and balance of inventory. This metric has an effect on the working capital of the company as it focuses on the ability of a company to meet its cash demand in time. For this, a perfect inventory balance needs to be maintained for meeting such demand and at the same time, this amount should not be so much which shoes a negative impact of more unsold goods. Thus a perfect balance needs to be maintained.
This is an important factor that judges the company’s capability to sell its products and collect the funds from the sale. It is calculated a total sales divided by the amount of account receivable.this also has a good effect on working capital so its adequacy needs to be maintained and properly calculated on a timely basis.
Working capital turnover
This is an important factor in working capital. A proper ration needs to be maintained, again a balance between high and low. Because a High value will indicate that the company cannot meet it’s quick or near the date obligations whereas a low will mean that it hasn’t used its full capacity of assets.
Therefore these tools must be carefully analyzed and maintained punctually so that there is a good working capital position of the company.