7 "golden" principles in capital management for businesses

Capital management plays an important role that can impact the ability to operate and develop a business. In the content below, let's join 1C Vietnam to learn information about the definition, importance and "golden" principles in capital management for businesses.

1. What is capital management?

Capital Management is an important aspect for an organization or business related to the management and use of available capital for production and business activities. The main purpose of capital management is to ensure the effectiveness and sustainability of implementing the financial goals and business plans that the company has set out.

Managing a business's capital resources includes many of the following main activities:

• Mobilizing capital: Business management boards need to mobilize capital by borrowing from banks, issuing stocks, bonds or using equity capital to implement projects and business goals.
• Profit management: Administrators consider and consider using profits for reinvestment, ensuring the most benefit to the company's operations, contributing to improving business capital.
• Risk assessment: Capital management activities also require managers to accurately identify and evaluate the impact and occurrence time of potential risks and develop a plan to eliminate or minimize the impact.
• Optimize capital structure: When managing capital, businesses also need to determine how to optimize capital structure to ensure the ratio of debt and equity is balanced and appropriate to help bring benefits to the organization. .
• Cash flow management: Carefully monitoring and managing cash flow is a necessary activity for businesses to manage capital effectively. On that basis, the company has enough cash to repay debt when it comes due, while investing in growth projects as well as maintaining daily operations.

2. 7 principles of capital management

To manage capital, businesses need to comply with the following 7 important principles:

2.1. Clearly identify working capital sources

To determine the amount of working capital needed, the company should rely on its goals in the previous accounting period. With available data, businesses can determine the difference between plan and reality, and on that basis build a capital mobilization plan.

Determining the amount of working capital needed helps businesses avoid excess or waste of capital, limiting the risk of capital shortage and business interruption.

When developing a working capital plan, businesses should consider the following factors:

• The amount of working capital must be determined based on the financial plan during the business process.
• Before planning working capital, the company should analyze and calculate financial goals for the previous period.
• The company needs to prepare its capital plan by predicting operating conditions, market fluctuations, and growth potential in the coming year.

2.2. Effectively exploit business and working capital

Enterprises can exploit and use business and working capital through the following channels:

• Bank: This is an additional source of capital and is not a source of capital to form the company's working capital.
• Joint venture/association: Joint venture is a form of cooperation in which businesses not only mobilize capital for business operations but also learn management experience, absorb scientific advances and transfer technology.
• Appropriated capital: Appropriated capital is the debt that the business must pay to the seller or the buyer pays in advance. Appropriated capital will not be used as the main source of capital that can be mobilized.

2.3. Manage revenue well, optimize appropriated capital

To strictly control revenue and avoid capital abuse, businesses need to pay attention to the following issues:

• Regularly and closely monitor receivables to prevent them from becoming bad debt.
• Implement financial measures to promote product sales and limit capital abuse including late payment penalties, payment discounts,...
• Use financial resources wisely and flexibly to collect debts and maintain relationships.
• Based on the principle of "full delivery, full payment", businesses must require the seller to sign a property insurance contract or apply sanctions to the contract when purchasing and paying in full or returning the goods. in advance to avoid loss or damage to property.

2.4. Take advantage of idle capital

Idle capital is money that is not invested, has no plans for use, and is at risk of gradually losing value when inflation increases. Therefore, instead of leaving a large amount of capital idle, businesses should take advantage of reinvestment, expansion, and development of effective business projects. That not only helps protect the available value of idle capital but can also generate profits and bring profits to the company.

2.5. Manage inventory well

Good inventory management contributes to reducing costs incurred, limiting negative impacts on the business's capital resources. To do this, businesses need to perform the following activities:

• Inspect warehouse entries carefully to eliminate defective products in the first place and avoid damage to the company.
• Regularly review books and take measures such as releasing pre-ordered items to quickly recover capital.
• Adjust product imports promptly according to market fluctuations.
• Similar to debt, businesses must regularly monitor inventory to determine whether minimum or maximum inventory limits are exceeded and prepare how to handle the excess.

2.6. Increase sales efficiency

Businesses can expand their consumption system, speed up product turnover and avoid capital loss by:

• Research conditions, learn about customer preferences and expand consumption systems in demanding markets.
• Apply preferential policies for remote customers with preferential price, shipping or payment conditions.
• Strengthen cooperative relationships, marketing, expand consumer markets, establish a system of stores and distributors nationwide.

2.7. Pay attention to risk management

Capital management activities in businesses are also likely to be affected by risks arising during the operation and investment process. Therefore, businesses need to focus on risk management to ensure financial resources are effective through the following activities:

• Insurance for goods stored and transported.
• Build cash reserves, bad debts and inventory discounts.
• Check and review at the end of the period to re-evaluate the quantity of materials, goods, capital and accounting records, on that basis helping businesses overcome any remaining discrepancies.

3. The importance of capital management in businesses

Business capital management is a very important issue for businesses. If not implemented and closely monitored inflow and outflow of cash, businesses may face many difficulties and challenges that are difficult to predict and respond to promptly.

For example, when creating a product, managers need to know whether the revenue received is timely and relevant to business operations. Because, at a certain period of time, businesses will have to use financial resources to pay for items such as salaries, new raw materials and debt,...

Here are some reasons why capital management is especially important for businesses:

• Effective capital management means managing the company's overall cash flow. This allows businesses to calculate and prepare response plans to eliminate or reduce arising problems that can negatively affect development and growth.
• When capital is well managed, it will allow businesses to maintain a reasonable ratio of equity and debt to be paid.
• Managers can base on understanding input and output sources to build detailed allocation plans, suitable for the company's projects. This is an activity that helps businesses maintain capital balance.
• Implementing effective capital management in businesses will help protect profits and increase the level of competition in the market. Only when capital is controlled can a company have enough financial resources to invest in potential development projects that can bring high profits. At the same time, strictly managed capital also avoids inappropriate, hasty investments that lead to losses.

Thus, capital management plays a particularly important role in the operation and growth of businesses. Therefore, managers need to thoroughly research and accurately grasp information about management principles, and on that basis apply creatively and in accordance with the company's characteristics. Don't forget to follow other articles on 1C Vietnam's website to be provided with detailed and specific information about corporate governance.