Definition of Capital management
Capital management refers to the financial strategy that businesses adopt to efficiently use their finances and meet day-to-day expenses. Basically, it gives a business the ability to manage funds in the best possible way to avoid cash deficits.
The key to effectively managing capital is to increase or speed up cash inflows and decrease or slow down outflows. It doesn’t necessarily mean the business should stop paying suppliers or pay after the deadline since it could have repercussions like penalties and suppliers stopping accepting new orders.
It simply means to delay payments to an extent that is acceptable and have a robust receiving system that receives payments at the earliest.
How to Manage Capital Effectively?
Here is what you can do to effectively manage your business’ capital.
Reduction In Inventory
Purchasing and keeping inventory stock means cash outflow and opportunity cost. If your business’ inventory turnover is slow, you need to follow the Just-In-Time (JIT) inventory system. That would save the cash that you could spend to meet day-to-day expenses.
Monitor Assets & Liabilities
You should take a step further and plan short & long-term income and expenses. Also, if you are going to acquire an asset, you should have a robust system in place to generate and save cash for the asset.
Efficient planning will lead you to have a surplus cash balance and you won’t have problems meeting an unforeseen liability or expense.
Conclusion
Having enough capital is extremely important for businesses to run smoothly and meet routine expenses. Many profitable businesses shut down operations due to not having enough cash to pay back what they owe or simply to purchase inventory or materials. Therefore, capital management is a helpful tool for businesses out there.
Capital can be simply managed by increasing your earnings or other inflows, and decreasing or limiting expenditures or outflows.
