The Importance of Working Capital Management in Business Accounting

25/10/2022

With the current cost of living crisis causing pressure on businesses, you could argue that the UK hasn’t been in so much financial uncertainty since the 2008 financial crisis. With business owners struggling to make ends meet, there’s never been a more important time to consider a career in accountancy. Whether you are looking for the best place to pursue your financial ambitions or simply have a passion for numbers, look no further than the University of Bolton. Offering an accounting degree that has been voted first in the UK for Student Satisfaction* and is accredited by the Association of Chartered Certified Accountants (ACCA), we give our students the quality teaching they need to learn how to make a positive impact on businesses' success.  Accountant presenting

Working Capital Management – What is it? 

If you are a current A-level student looking into studying accounting, then it’s fair to say that you are unfamiliar with working capital management. Or you’ve heard the phrase but unsure of what it is. When running a business, managers need to ensure that they have enough money to meet their short-term obligations. This includes things like paying suppliers, employees, and other bills. These days, it's becoming a crucial focus for small business owners due to macro-economic factors that are causing a complex business environment. In fact, many small business owners report not understanding what type of finance will fit their operating model. 

This is where accountants become useful. Their role enables them to understand what constitutes working capital and identify what the problem areas of a particular business are. From this, accountants should be able to develop a strategy to improve poor working capital management. At the University of Bolton, we can help guide you on the path to understanding this with our own financial management module as part of our BA (Hons) Accountancy course; teaching our students the fundamentals of working capital management, helping get them employment-ready in a challenging yet rewarding industry. 

Factors that affect working capital needs  

A fundamental aspect of working capital to remember is that financial needs change for every company. A financial asset that is critical for one company might be irrelevant for another. Let’s explore some of the different factors that affect the working capital needs of a company.  

Managing Liquidity and Short-Term Debt  

When talking about business liquidity, we are referring to a business’s ability to pay their bills on-time without compromising operations, selling available assets, or taking on additional debt to free up funds. This means that as a business accountant, it’s essential to ensure that the company has more current assets than liabilities when their bills are due. This is because current assets are cash and other elements that are expected to be converted into cash within a year, whereas current liabilities refer to the amount that is set to be paid to paid to creditors within 12 months. If current liabilities are higher than assets, then business accountants should be able to recognise a cash flow problem that needs rectifying. 

Managing Inventory  

Inventory management is the term used to ensure that a company has enough inventory to deal with both ordinary operations and fluctuations in demand without investing too much capital in the asset. This is critical for accountants to consider when managing a business’s finances as the total level of inventory a business has will have a significant amount of capital invested in it. While having too much inventory can be damaging to the success of the business, not having enough inventory can be just as bad. Not enough inventory equates to a loss of sales and ultimately a profit loss. 

Accountancy
Managing Payables  

No business can succeed without neither supplies nor suppliers. Whether this is in the form of tangible or intangible assets, or clients if the company is a B2B business; businesses need to ensure that they have the right balance between early payments and commercial debt when dealing with trade credit from suppliers. Late payments can mean damaging the company’s reputation and supplier relationships; and commercial debt can lower its creditworthiness. Subsequently affecting future supplier relationships. 

Study Accountancy at Bolton University 

Now you have a better understanding of the importance of working capital management and some of the factors that affect it, you should be in a more knowledgeable position to choose the best university to pursue your BA (Hons) Accounting degree.  

At Bolton University, our accounting course will equip you with the skills you need for a career in working capital management. Whether you choose our three-year course or the four-year option starting with a Foundation Year, you will get the chance to study in direct contact with our dedicated and experienced lecturer team, who will provide you with the relevant knowledge to give you a strong academic and vocational background for a long-lasting career. 

Studying in our £4 million Institute of Management building, our accountancy students gain practical, industry experience in our supportive learning environment through gaining access to leading employers, regular networking events, and exposure to high-profile business lectures throughout their studies. Accountants are essential colleagues to any business. Come and join the Bolton family and see why our students enjoy the supportive and inclusive experience that we provide. 

Take a look at our full course details to find out more information and see why choosing the University of Bolton is the right decision.  

Want to speak to us? Visit in person by booking on one of our upcoming Open Days or contact our team by email at enquiries@bolton.ac.uk or call us on 01204 903807. 

*Complete University Guide – 2023 - UK 

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104
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