Managing working capital is one of the crucial aspects of a business irrespective of its size. Working capital vouches for the financial stability and efficiency of an organisation. Concrete working capital management ensures business continuity and success in the long-run. Working capital is calculated by subtracting the current liabilities of a business from its existing assets. It is broadly divided into gross working capital and net working capital. The gross working capital is the summation of all current assets of a business. One can get the net working capital by subtracting the total working capital from current liabilities.
One can calculate a working capital ratio by dividing the current assets with current liabilities. A ratio ranging from 1.2 to 2.0 signifies the business has ample working capital for successful operation. On the other hand, a ratio of 1.0 or lower indicates the organisation is in troubled waters.
For such conditions, a business can opt for a working capital finance. NBFCs like Bajaj Finserv offer such types of loans along with attractive features.
Why is Working Capital Necessary?
Working capital is necessary for meeting all the daily expenses of a business. Few such costs include utility bills, rent, wages, etc. However, different types of businesses have dissimilar working capital needs. In fact, it may also differ among firms engaged in the same sector.
Some of the reasons for which this fund is necessary are:
- Timely Repayments: – Businesses that have a strong working capital can make timely repayments to their debtors. Thus, they gain goodwill by maintaining a cordial relationship with their vendors.
Furthermore, a company can earn discounts from its suppliers by making full repayments on time.
- Continuous Cash Flow: – Proper working capital management provides constant cash flow to the business. Hindrances in cash flow will restrict production and cause a chain reaction of several problems.
On the other hand, an uninterrupted supply of the same will increase the solvency and liquidity position of a firm.
- Financial Emergencies: – Market conditions are unpredictable, and with that come potential financial crises. Businesses with abundant working capital can tackle any form of financial emergencies.
- Full Utilisation of Fixed Assets: – Companies can fully utilise their fixed assets with robust working capital management. However, they have to pay interest on the loan for purchasing fixed assets and also, depreciation in case there’s a shortage of working capital.
Full utilization of fixed assets also ensures that the business doesn’t encounter bankruptcy.
- Lowering the Operating Cycle: – The operating cycle begins by acquiring raw materials, converting into finished goods, and selling it for earning revenue.
Constraints in the working capital can cause the operating cycle to extend over a prolonged period. The more time the operating cycle takes for completion, the more financial problems it will invite.
Hence, adequate working capital is significant for a business to complete this operating cycle as soon as possible.
- Increases Creditworthiness: – A constant flow of working capital will increase creditworthiness of a company. With increased creditworthiness, a firm will also have high chances of getting an unsecured loan of the considerable amount approved.
Some other importances of working capital include:
- Increased profitability and keeping small businesses alive.
- High return on investment.
- Staying ahead of the competition.
- Paying dividends to shareholders.
Why is Working Capital Management Necessary?
Proper management of working capital ensures that a business achieves all the feats mentioned above. It also makes sure that a firm manages its accounts receivable, accounts payable, cash, and inventory efficiently.
In short, strategic management of working capital will keep a business healthy and sustainable.
As mentioned above, firms which encounter constraints in working capital can avail a loan for the same. A working capital loan from Bajaj Finserv can provide numerous benefits to a firm. They provide financing up to Rs. 30 Lakh and even process it under 24 hours.
Bajaj Finserv additionally comes with pre-approved offers on such loans. These offers are also available with business loans, mortgage loans, personal loans, EMI product financing, and other financial services.
Pre-approved offers ease the process of availing funds by making the process hassle-free. Provide few of your necessary information to take a look at your pre-approved offer.