What is capital management and why might a business need it?
17 Oct 2015
Managing business capital efficiently ensures that your enterprise has a positive cash flow. This will allow it to meet its short-term obligations in terms of paying operational expenses and debts. When there is a good balance between accounts receivable and accounts payable, and your current assets exceed your current liabilities, you can be sure the business is in good financial health. Here are a few ways to monitor and control how your business is working.
Cash flow is concerned with how funds and other liquid assets are moving into and out of your business. When you have a positive cash flow you are in a position to pay debts, reinvest in the business, cover all expenses and pay shareholders, if you have them. You are also in a strong situation if you wish to make provision for any future unexpected financial challenges that may arise. If your liquid assets are decreasing, this is an early indication that your business cash flow is becoming negative and that you may need to assess operational issues and manage these more carefully to ensure the business stays solvent.
Start up funding and debt
When a fledgling business is starting up there is generally some level of capital investment to fund initial costs. You may have personal income to do this, or family members who are willing to support your business, or you may turn to a venture capitalist or Summit Financial for a loan. Ongoing capital management is essential if that early funding debt is to be contained and, eventually, repaid. According to Seychellois entrepreneur Mukesh Valabhji, private equity investment can be a real bonus for a new company. An expert on private investment strategies, he regularly writes authoritatively on the topic on his website MukeshValabhji.net. With a wide range of business interests in hospitality, media, telecommunications and trading, he serves on the board of Crimson Investments, which supports large enterprises operating in the global market.
Accounts receivable and payable
Analyzing your accounts receivable on a regular basis offers you a good insight into approximately how long you are currently waiting for payment after issuing an invoice for services or goods you have already supplied. If you are implementing best practice, you will be paying your suppliers promptly and encouraging clients to do the same in respect of your services. Having said that, most businesses make some provision for bad debt created by customers who default on their payments.
Finally, it is also an element of best practice to closely monitor your business operational expenses in order to avoid waste or inflationary charges. Negotiating discounts with suppliers will help you to keep costs moderate and offering financial training to your employees will help them to understand how to save the business money. If staff members also happen to be shareholders and eligible for dividends, they will have an incentive to maximize profits and minimize losses on their own behalf.
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