The Importance of Working Capital Management in Business Accounting

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 embrace the opportunities available and consider a career in accountancy. Whether you are looking to a pursue a challenging career in the financial sector or simply have a passion for crunching the numbers, look no further than the accounting degree that has been voted first in the UK for Student Satisfaction* and is accredited by the Association of Chartered Certified Accountants (ACCA). At the University of Bolton, we give our students the quality teaching they need to learn how to make a positive impact on businesses’ success. 

What is Working Capital Management? 

If you love mathematics and want to learn how to become a vital part of a business’s finance team, you’ll need to be aware of what working capital management is. To put it simply, 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 macroeconomic factors that are causing a complex business environment. In fact, many small company owners report not understanding what type of finance will fit their respective business model.   

This is where accountants become useful. Their role enables them to understand what constitutes as working capital and identify the problem areas of a particular business. From this, accountants should be able to develop a strategy to improve poor working capital management.  

There’s no standard list for what working capital is as it changes 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  

Business liquidity refers to a company’s ability to pay its bills on-time without compromising operations, selling available assets, or taking on additional debt to free up funds. This means that a key responsibility of accountants is to keep company finances in check to ensure that their current assets are greater than their liabilities. This is because current assets refer to tangible elements that are expected to be turned into money within a year. Whereas current liabilities refer to the amount of money that is set to be paid to creditors within 12 months. So, this is why businesses encounter cash flow problems if they end up with total liabilities outweighing their assets. 

Managing Inventory 

Inventory management is the term that is used to ensure that businesses have enough inventory to deal with both their ordinary operations and fluctuations in demand without investing too much capital. 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 in the event of a period when the business is experiencing high product demand, ultimately leading to profit loss.   

Managing Payables  

Every business needs supplies and suppliers to succeed. 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.  

Why Accountancy is the Degree for you! 

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 right university for you to pursue your BA (Hons) Accounting degree.   
 
At Bolton University, our accounting course will equip you with the skills you need for a successful career. Our students get to study in direct contact with our dedicated and experienced lecturer team, who provide them with the relevant knowledge they need to gain a strong academic and vocational background. 
 
Studying in our £4 million Institute of Management building means gaining practical, industry experience in our supportive learning environment through access to leading employers, regular networking events, and exposure to high-profile business lectures throughout your 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.  
 
Look at our full course details to find out more. Come and visit us by booking on an upcoming Open Day and seeing what #UniAsItShouldBe is all about.  

To speak to our team, you can email us at enquiries@bolton.ac.uk or call on 01204 903807.  
 
*Complete University Guide – 2023 - UK