Working capital: Important for Smooth Conduct of Business in the Long Term
Sound management of the operating liquidity thus includes balancing profitability, growth, and fund availability at the same time.
The concept of working capital primarily relates to the difference between the current assets held by a company and its existing debts or current liabilities.
It indicates whether a company has sufficient cash-flow that meets its regular expenses or short-term debts.
Enterprises use various means to manage the operating liquidity of a business, including capital loans.
Management of working capital
There are four primary components of working capital management adopted by businesses to maintain operational efficiency.
- Cash management
Cash includes both ready cash and near cash, comprising an essential component in a company’s current asset.
It is essential to maintain the outflows and inflows of cash to ensure the maintenance of adequate cash at disposal. In the case of deficits, companies can take a capital loan to infuse additional liquidity.
- Receivables management
Money owed from the customers in the regular course of business is considered as receivables, which are a part of the working capital of a company. Its management includes maintaining the receivables cycle for the timely recovery of invoices.
- Inventory management
Reduced investment in inventory eases cash flow as it comprises a substantial part of the working capital of a company.
- Accounts payable management
Accounts payable refers to money owed to the creditors, and the same can act as an immediate source for funding working capital. Managing the payables involves taking measures that keep the payment cycle at an optimum.
Importance of working capital for conducting business
Working capital management is crucial to running a business’s operation efficiently in both the short and long run.
- Need for additional capital
Additional capital may be needed with the onset of a busy season or to keep the business operations afloat.
Problems are likely to arise in the event of seasonal differences in the cash flow of a company.
- Funding obligations
Extra capital may be required by companies in specific instances where such obligations may arise which demand immediate funding.
While a company waits for payments to be realized from its customers, it may be hard-pressed to meet obligations due to employees, or suppliers, thus requiring adequate working capital flow at all times. A capital loan will help a company to tide over such issues.
- Improvement in business
Further, improvement in a business, in all likelihood, may require additional working capital. For instance, a company may be able to avail of the benefit of discounts provided by suppliers by making bulk purchases. Such high-quantity purchases invariably incur a significantly higher cost.
- Covering expenses
Specific project-related expenses, payment of temporary employees, or perhaps, any other expenses which have not been marked in the budget would necessarily require adequate working capital as well.
- Operational efficiency
A company stands to enjoy a ‘safety net’ with optimum usage of working capital. It helps in mitigating hindrances that may arise in business operations in the future.
For example, a company may have problems in terms of payment delay of suppliers or lack of production. Such instances are indicative of how much working capital would business needs.
- Increased profit
Business can be conducted smoothly with an optimum level of working capital. It is usually achieved with a balance of accounts receivable and accounts payable.
When suppliers can be paid as per agreed terms, and within the due time,
Maintaining the correct level of working capital is crucial. Working capital exceeding the optimum limit indicates that cash is not invested correctly, which can lead to inefficiency.
When the level of capital is lower than required, business operations will be disrupted. The company may have to take a working capital loan to make good of the deficit.
If you are facing issues concerning the finances, you may avail of business loans for working capital financing from trusted financiers.
Lenders like Bajaj Finserv provide pre-approved offers for easy and quick loan disbursal. Such offers are available on a host of financial products, which is inclusive of business loans, credit cards, and personal loans, among others.
As for business liquidity, it is important that you remain mindful of the importance of working capital, or availing a capital loan, as the case may be. It ensures that a business is run without hindrances like a disruption of its operations.
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