What Everyone Must Know About Capital Management?
Capital management is the type of financial strategy that is mainly aimed for maximum efficiency in the company’s cash flow. The main aim is for the business to have sufficient means in meeting its day-to-day expenses, and meeting the company’s financial obligations in the short term.
Different types of objectives of capital management to know
- The main objective of capital management is the smoothening of the working capital operating cycle. This mainly indicates that the operating cycle i.e. the cycle being started from the acquisition of the raw material and the conversion of the same to cash must be smooth.
- The next objective is mainly involved in the lowest working capital. The working capital mainly refers to the current assets minus the current liabilities. The same should be optimized as the higher working capital implies the higher interest cost and the lower working capital implies the risk of disturbance of the particular operating cycle.
- Capital management also aims in minimizing the rate of interest as well as the cost of capital. The cost of capital that is being utilized in working capital must be reduced for achieving higher profitability. The cost can also be minimized by utilizing the long-term funds but the same must be done in the proper mix.
- The CM or capital management also aims to have the optimal return of the current asset investment.
Importance of the capital management for any business
- Some businesses often face issues due to the lack of cash needed for their operations as well as for repaying the short-term debts. It mainly happens due to the ineffective or no working capital management policy of the enterprise. Working capital management mainly helps in ensuring liquidity by monitoring of the account receivables, stock management as well as debt management.
- Capital management mainly uses ratio analysis. Some of the ratios like working capital ratio, accounts receivables, turnover ratio, etc. are mainly calculated and interpreted for providing information to management. Such information mainly helps the managers in planning as well as efficiently executing business operations.
- Capital management helps in increasing the profitability of any business in the long run.
- As capital management mainly helps in dealing with the management of the cash in an enterprise. It mainly evaluates the sources of cash inflows as well as determines the outflow of cash in the best possible manner.
Different components of the capital management
- Current asset: These can be defined as, the type of assets which can be easily convertible to cash in less than one year. These current assets are basically utilized in meeting the requirements of daily operations for any business.
- Cash as well as cash equivalents: This component is the liquid form of the funds and very important for every business in maintaining the smooth operations of their business.
- Account receivable: This is the amount of money that is mainly receivable from clients due to credit sales by the said company during the normal course of business. These are important as that they are mainly categorized as assets but in reality, they are not available for usage until they are realized in a more liquid form.