Invoice Bazaar Blog

Why is a strong working capital management strategy crucial for every SME?

By Invoice Bazaar | November 5, 2021

Working capital is the difference between a firm’s current assets and its current debt and financial liabilities, where current assets include accounts receivable, cash, and inventory, and anything that can be converted into cash during the current financial year. It reveals how much money your business can access at any given point in time to meet expenses. A clearly defined strategy to manage working capital is indispensable because working capital is what you use to pay salaries, taxes, utility bills, and for raw materials, license fees, and every operational expense. So, when an SME is growing and when it has the maximum need for cash, a lack of working capital can cripple its operations.

Efficient working capital management strategy safeguards the long-term financial health of a business enterprise and prevents unanticipated operational debacles by ensuring an uninterrupted flow of cash, even during economic downturns. That is why cash flow is considered to be the lifeblood of every business venture. Therefore, if your firm’s working capital runs out, your business may come to a standstill and fail. Meanwhile, appropriate working capital management strategies leverage assets and liabilities, inventory turnover, and accounts receivables, thereby lowering the risks of failure that may plague small businesses. Your firm may start small, but it cannot afford to remain small forever. 

Furthermore, SMEs are particularly vulnerable to working capital woes because, for them, survival and growth are synonymous with success. Much of their initial earnings are immediately spent on acquiring the licenses, staff, inventory, marketing initiatives, and other essentials, which are imperative to quickly reaching the scale needed for business stability. Furthermore, small businesses can often fall into the credit trap as they may make unnecessary purchases based on assumed needs of an uncertain future. Here, a solid and sensible working capital management strategy proves helpful by saving the firm from incurring more debts than it can pay within the prescribed timelines. Thus, a strong working capital management strategy is crucial for every SME.