We may not talk about the term ‘working capital’ every day but this term may hold the key to your Company’s success. A distinguishing characteristic of good business management is its ability to utilize its working capital to maintain the right balance between the three key components i.e. growth, liquidity, and profitability.
What is Working Capital?
The calculation says
Working Capital=Current Assets-Current Liabilities
This indicates whether the firm has the adequate cash flow to take care of the short-term debts and expenses. It also helps in identifying the cash shortages and helps to pinpoint where the cash is tied up. Moreover, the financially sound firms rightly demonstrate the current assets that are greater than current liabilities.
Broadly we would look into two aspects of Fund Management- its role and its importance for a business. Secondly, ways to maintain a good capital flow for an uninterrupted business operation.
As we all know, it is easier for an agile business to capitalize on new market opportunities and evolve to keep pace with advancements in technology or buying behavior and diversify to suit new demand. Fuelling your finance gives you access to all of these, thus providing you with the desired agility.
How Working Capital Helps Your Business?
These funds can be leveraged for various business needs like hiring resources with different skill sets, buy equipment or software, pay for needed inventory, employ marketing executives and carry out R&D.
In cash crunch situations, we go for business loans such as MSME loan. The same applies to working capital. In crunch situations, we may opt for working capital loans given by various financial organizations.
These loans can be utilized to purchase inventory before the busy season in your industry. It enables scaling up the business to its true potential while providing room for a margin of error.
Taxes also arise on at inconvenient timings. Short-term capital loans assist in paying the taxes without even depleting the fund low.
Furthermore, it gives you the potential to buy out a silent or ineffective partner. Sometimes, the best answer to a cash crunch is to opt for short-term working capital loans.
Every business needs a healthy cash flow measure to survive in the industry. Effectively managing the firm’s working capital is paramount for any business to ensure that the business is operated smoothly, survives well in the competition, and also scales up in the long run. We have several ways to ensure that and below listed are some of them.
How Capital Loan Will Help You Scale Up Your Business?
1. In case of a shortage in funds, one should always opt for a working capital loan. This ensures that you have sufficient capital to buy in bulk so that you are eligible for discounts. It also means that you can ramp up quickly if sales pick up suddenly.
2. be watchful of business spending and income. Work around for a good budget every month to ensure this. Make sure you have credible clients who make the payments on time. Also restrain from paying your suppliers before you get paid from the client.
3. Ensure that you do bookkeeping diligently, so that you can spot gaps in the working capital before it widens and cause daily operations to stumble.
4. Plan on investments only when your earnings cross the working capital limit and you have excess funds. While making investments, choose those that give you high liquidity so you can withdraw your funds when needed.
5. Don’t tie up working capital in an asset purchase. At some point, your business may require specialized software or expensive equipment. Using your working capital to fund such assets may not be a good idea as it is likely to block it from coming to your use for day-to-day expenses. It is a better idea to take an affordable business loan or MSME Loan.
6. Avoid keeping unsold inventory. This ensures that you don’t waste space in storage, which will help you save a little extra on rent.
Every business has its own risks and no there is no better time than this pandemic to restore things and, how uncertain and susceptible firm are to adapt to the economic crises.
Working capital financing can help navigate an unprecedented crisis by providing enough caution to manage essential expenditures to keep the business afloat.
When you run a small business, it’s common to get caught up in the day-to-day of operations and never take the time to look up and take stock of where you are and where you’re going. It is important to do this on occasion, because without it, you’ll run the risk of not having the resources you need when you need them. (If you’re looking for more ways to get ahead, check out these 4 tips to help you get ahead of the competition.)