It is common knowledge that effective management of working capital is essential for the smooth operation of any business. Maintaining a healthy quantum of working capital means that a company has sufficient cash flow to meet its daily business expenses, ranging from rents to paying bills to the employees. Most small businesses fail to grow due to a lack of adequate cash flow.
Hence, an individual who has started a business must know what is working capital and its advantages. This will assist him in understanding its importance, enabling him/her to manage it properly and run a business without any financial hindrance.
What is working capital?
Working capital is given by the difference between the current assets and current liabilities of a company. The current assets of a company include stock or bonds, account receivables, inventory, etc. At the same time, current liabilities involve short-term debts, payments on rent, taxes etc.
Why is working capital important for business growth?
Maintaining a balance between the two factors is important as more liabilities mean less cash flow. An irregular cash flow may lead to hindrances in a business’ daily operations, like maintaining sufficient inventory or meeting overhead expenses. It may also further influence other financial decision, such as applying for a business loan, opting for a partnership, etc.
Therefore, calculating working capital becomes important in managing one’s financial ground in business.
How to calculate working capital? The following section provides a definitive answer.
To calculate the working capital of your business, you will need to divide the company’s current assets with current liabilities and acquire the turnover ratio.
A favourable working capital turnover ratio must be 1. This ratio signals that a company has a strong financial ground in terms of cash flow. This ratio varies from one industry to the other as some require higher liquidity. A higher or lower value than this indicates that the business’ current asset and liability must be evaluated to enable proper management.
Further, a substantially higher working turnover ratio is interpreted negatively. This indicates that the company is not performing at its optimum to employ the assets to generate maximum possible income and is failing to take advantage of business expansion opportunities.
How to manage working capital?
After knowing what is working capital and how it works, one needs to understand how to manage the same by following simple steps:
- Keep track of the account payables and account receivables. If an individual lags behind in tracking the accounts and fails to keep them up to date, it may cause financial problems later.
- A monthly analysis of inventory turnover ratio and bill collection ratio is necessary to maintain a business operation cycle.
- One can opt for working capital finance to boost the cash flow and manage delayed payments.
In case an individual is willing to bridge the gap in the working capital requirements, he/she can apply for a working capital loan from leading financial institutions or NBFCs like Bajaj Finserv.
The NBFC provides a working capital loan of up to Rs.45 lakh without any collateral and credits against simple eligibility parameters and minimum documentation.
The NBFC also extends pre-approved offers to streamline the loan application process and save time. These offers are available on business loans, personal loans, etc. Check your pre-approved offer by providing your name and contact details.
Working capital supply helps the business to stay agile whenever it is facing any monetary challenges. Knowledge of what is working capital and how to calculate it helps an individual keep track of his/her business’ financial health regarding matters ranging from scaling up the business operation or to repaying the outstanding debts.