the importance of establishing policies for the control of working capital

The Importance of Establishing Policies for the Control of Working Capital

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FINANCE

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Good management of the working capital is key to the profitability of the business entity and general liquidity of the firm . This is an attempt to underscore the importance of instituting sound management of working capital to ensure the success of the business . The working capital is needed for the purpose of making sure that the stocks are paid for and that all amount of credit extended to customers is covered effectively . This

capital consists of items that are comprised in the short term assets list (PlanWare 2009 . These include stock , liquid cash , debtors . Creditors are subtracted from the result of the sum of the mentioned items

The above list of items that comprise the working capita can be looked at in terms of two major things . First , we realize that current assets are an essential part of the working capital but it is important that the same be looked with respect to the level of current liabilities Adequate cash flow is important to ensure that the business operation is not interrupted and this is irrespective of the size of the business entity . Any business that has liabilities must settle the liabilities using cash not profits (PlanWare 2009 . Proper management of the working capital is important to guarantee a proper balance between the current liabilities and the cash that is available to pay off the liabilities

The main objective of properly managing the working...