Financial Insights for Business Success: Navigating the World of Working Capital

Working capital is an important financial parameter that every entrepreneur must monitor. It helps evaluate whether the business can withstand market downturns. It indicates a company’s liquidity level to meet short-term expenses and everyday operations. A company uses this fund to cover various costs, including paying salaries to employees, payments to vendors, and building a fund for future needs. Since capital has a remarkably high significance for business success, let’s navigate its world in the realm of business.

Understanding the Meaning of Working Capital

It entails business liquidity and its financial health in the short term. It also refers to a company’s capacity to utilise its assets regularly and efficiently. As an economic parameter, you may calculate it by subtracting current liabilities from current assets. Assets include cash, accounts receivable, inventory, etc., while liabilities include staff salaries, interest owed, accounts payable, etc.

A positive figure indicates that a business can manage its bills efficiently and has enough funds for sound investments. On the other hand, a negative figure implies that the company is struggling to fund its everyday operations, signalling a financial issue in the future. Therefore, effective working capital management must monitor the balance between assets and liabilities and maintain cash flow to cover short-term expenses.

A business should maintain liquidity, reduce the operating cycle, free cash from the balance sheet, and minimise external financial sources. Eventually, it helps a business use the assets optimally and handle liabilities for smooth operations. While looking for external funding, lending institutions offer a reasonable Business Loan interest rate to companies with sufficient capital assets.

Steps to Calculate Working Capital

Calculating the capital ratio gives a sense of where you currently stand. Use this formula to calculate it:

Current assets / Current liabilities = Working capital ratio

For instance, if your current assets are worth Rs 1 million and liabilities are worth Rs 5,00,000, the capital ratio is 2:1. Although it is a healthy ratio, a percentage of 1.2:1 is also adequate for some business types and industries. Your net capital ratio indicates your available money to cover current expenses.

The formula to calculate the net capital is:

Current assets – Current liabilities = Net working capital

While doing these calculations, consider only your short-term assets like cash, accounts receivable, and inventory that can convert into cash in the next twelve months. Short-term liabilities include accounts payable, debts, and regular expenses like salaries and taxes.

Significance of Working Capital

Working capital is important for your business in the following ways:

1. Manage Liquidity

You need enough cash and liquidity to carry out your regular operations, which you can easily fulfil with capital. Determining your capital requirements gives you a clear idea of your financial position. Accordingly, you can arrange the required funds while ensuring cash flow and adequate liquidity for daily expenses. Otherwise, negative capital figures can impact your brand image and company operations.

2. Earn Short-Term Profit

Sometimes, your company might have funds in excess. If your current asset ratio is high, you have more funds than you require. You can invest the excess funds to generate short-term profits from other avenues.

3. Better Decision Making

Working capital helps an entrepreneur make sound business decisions. It allows them to calculate everyday financial requirements and evaluate their current situation. Accordingly, you can decide on an adequate source and external funding. A working capital loan helps you manage and tide over a financial crunch to fund your daily operations.

4. Value Addition

A positive capital figure implies that your company has sufficient cash to meet your short-term obligations and day-to-day operations. Consequently, it improves your business’s creditworthiness in the market, ensuring more profitability and increased bargaining power. With added value to the company, you get a bigger chance to achieve higher organisational objectives.

Benefits of Sufficient Working Capital

Adequate working capital ensures sufficient funds to finance daily operations and fulfil short-term obligations. The key advantages of positive capital for a business are as follows:

Maintains company solvency by managing regular process cycles.
Timely supplier payments help improve business creditworthiness and goodwill in the market.
When you make timely payments to your suppliers, they may provide products or services at discounted rates, reducing costs and improving profits.
Improved creditworthiness helps obtain loans easily and at the lowest Business Loan interest rate.
Helps efficient management during market volatility or sudden financial crisis
Helps divert excess funds to productive ventures to generate more profits for the business
Manages business bills and expenses like taxes, salaries, etc.
Helps your business leverage favourable market scenarios into an advantage, especially to improve business deals and prospects
Improves your business’s overall competitiveness and efficiency

Tips to Increase Working Capital

Now that you understand the advantages of positive working capital, you must know how to maintain it. Some tips to increase the figures are as follows.

Take a Loan:

You may take a Business Loan to finance your everyday operations and repay it in flexible repayment terms.

Minimise Expenses:

Cutting unnecessary expenses improves your business’s operational efficiency, allowing you to work in an organised way.

Manage Inventory:

Avoid overstocking finished goods and raw materials to manage inventory and reduce cost.

Automate the Process of Accounts Receivable:

Automation improves cash flow and reduces fund usage for everyday business operations.

Sell Off Illiquid Assets:

This simple step will free up cash and improve the business’s cash position.

By now, you must have understood the world of working capital and learned how significant it is for your business. Major advantages of sufficient capital include improved creditworthiness and profitability. As a business owner, you can easily obtain an unsecured Business Loan to fund necessary expenses and build capital. Several NBFCs offer business finance to suit your requirements. Compare and get the best loan offer to support your capital needs and boost your chances of success.