Working capital is the operating liquidity accessible to a business entity at any given point in time. In other words, it is the amount of money available to a business to pay for its daily operations.
Working capital is one of the most crucial metrics that determine the financial health of a business. To understand it better, it is essential to have a clear idea about current assets and current liabilities.
- Current assets: These refer to the funds already available to a company along with an asset that will be liquidated in the foreseeable future such as accounts receivable and inventory.
- Current liabilities: These are the debts accumulated by a company that needs to be repaid within the fiscal year. Examples include accounts payable and company credits.
You can calculate your business capital requirement with the help of working capital formula which is subtracting the current assets from current liabilities. If the balance is positive, the business has a working capital surplus, and if it is negative, the company has a working capital deficit. How much working capital a business needs depends on several factors such as the nature of the enterprise, number of employees and the business’ stage of development.
A guide on working capital solutions
There are several ways in which working capital can be managed proficiently. Even if there is a shortfall, there are specific ways in which you can overcome the deficit.
Given below are some of the most commonly used working capital solutions.
- Invoice discounting
- Bank overdraft
- A business line of credit
- Advances received from clients
- Equity financing
All these methods are mixed bags with certain benefits as well as drawbacks. Equity financing, for example, gives you access to funds without having to worry about its repayment. However, it also means that you dilute your company’s shares to a certain extent and forfeit wholesome access over it as well as its profits.
Apart from these, one of the primary ways most businesses manage their working capital in case of deficits is by availing a working capital loan. Numerous financial institutions extend the Working Capital Loan to meet the cost of various regular expenses. These loans can be used to pay outstanding bills, meet overhead costs, procure raw materials, purchase inventory, pay suppliers and a host of other expenses.
Several features of working capital loans make it a suitable choice, especially for small and medium businesses. Viz. –
- Quick access to funds of up to Rs. 30 Lakh.
- Unsecured in nature, none of your business assets is at risk.
- Approval is quick (within 24 hours), and the disbursal happens within a day of approval. You can use this loan to meet any emergency cash needs.
- Documentation required is minimal.
There are several advantages of taking a working capital loan:
- It maintains the cash flow of the business.
- It helps you meet short term financial obligations of your business.
- The extra funds act as a cushion that you can leverage to get more business.
- It helps you retain the full ownership of your business compared to equity financing, where you have to give up a certain percentage.
Working capital is the backbone of any business. No enterprise can sustain for long if there is a continuous deficit of working capital. It is, therefore, crucial to manage it prudently and take external financing solutions if the balance is on the negative side.