5 ways Working Capital can help your Business

Working capital is the fuel to run any business. From paying employees salary to hiring new employees, sourcing of raw material to payment of vendors, everything comes under the ambit of working capital. It is the funds you possess in your books to meet your short-term and current business obligations. Working capital is therefore the key to drive your day-to-day business financial needs.

For any business to thrive, sufficient capital is the initial ingredient. Having adequate resources allow a business to expand, hire more people, produce more and start a new venture. Businesses in need of capital can raise funds through business loans offered by various financial institutions including banks and NBFCs.

Working capital – A metric to assess the financial health of a company?

The working capital available with any business is measured by deducting the current financial liabilities with current assets. It is the best bell-weather indicator of the financial health of a business.

A positive level of working capital indicates a well-managed business with good growth potential. It is an accurate barometer that indicates adequate cash flow is generated to meet all short-term fund requirements.

There are different ways to secure working capital for business. Some of the methods include business loans, inventory management, improving the receivables, and paying vendors on time.

Here we focus on five ways to ensure that working capital works for your business:

1) Enhancing cash-flows
Every business either established, or a new start-up goes through its share of lows and highs. However, it is necessary to maintain a steady flow of revenues to sustain the business and meet all financial obligations including salaries of employees, holding inventory, rent payment, utility bills, and more.

One way to enhance the cash-flow is through securing business loans. The surplus cash-flow can be used to meet the financial obligations and also re-invest in business to scale-up the production.

1) Capitalizing the seasonal swings
Many businesses are seasonal in nature, making robust sales during the festive months or summer holiday season. Such businesses need extra working capital requirements to procure goods twice or three times than the normal months. Sufficient capital available ensures that these enterprises take large order during the season, while during the lean season they can opt for working capital business loans to sustain their operations.

Businesses need working capital for the business to tide over the circumstances that emerged during the seasonal fluctuations. There are financial institutions that extend business loans to businesses both during the rush months to secure and capitalize on inventories and during the lean phase for sustainability.

1) Improve the credit score
One way to get working capital for business is through business loans from lenders. However, to obtain the funds at competitive rates, a credit score of the individual and the enterprise is important. Good credit score ensures that the loan is approved readily and that you can negotiate at competitive rates. Good credit score enables a business to get higher credit as it is an indication of disciplined financial behaviour, revenue stability, and timely servicing of debt.

1) Navigating the tough times
The working capital surplus is a cushion that can let a business to survive the tough times while exploiting the favourable period to expand. Working capital financing can provide the necessary funds to continue the operations and stay afloat during the lean phase.

1) Facilitate the growth
One of the biggest challenges for small businesses is to secure working capital for business at competitive rates. The lack of capital dents their prospects to sustain and grow. Sufficient working capital enables an enterprise to take large orders and capitalize on the opportunities. Working capital is thus necessary to exploit the opportunities and accelerate growth.

What are the benefits of surplus working capital?

Working capital is the engine on which an enterprise can function effectively. There are different benefits of surplus working capital, some of them are:
⦁ It improves the liquidity
By consistently maintaining a high level of working capital, an organization is in right place to explore upcoming opportunities and benefit while at the same time be prepared to confront unprecedented negative scenarios. It gives flexibility to the management of a company to take calculated risks. High liquidity enables an organization to take large orders, go for expansion, hire new employees and at a much faster rate.

⦁ Maintaining operational efficiency
Adequate working capital is essential to maintain optimum operational efficiency. Any problem related to delay in receivables or lack of production can be easily tackled with a sufficient level of surplus funds.

⦁ Increasing profits
One way to increase the profits is to bring operational efficiency in working. Making timely payments to vendors and servicing the debts to lenders ensures business loans assessed at competitive rates and raw materials procured at discounts. All these factors help in improving the profitability of a company.

Is maintaining high working capital enough for a business?

The importance of working capital is underlined in every business plan on which an enterprise functions. However, maintaining a high level of working capital is essential but equally important is the correct level of working level. If the company is cash surplus it indicates robust sales but doesn’t necessarily mean the company is looking to expand.

Maintaining a high level of liquidity indicates more money is available with the company than needed. It also indicates the surplus funds are not properly invested or the company’s growth is side-lined in favour of excess cash. Excessive level of liquidity will only lead to wastage and inefficiency. Thus, it is important to maintain the correct level of working capital in the business.

Conclusion

Working capital is the necessary key to maintain normal day-to-day functioning of an enterprise. From maintaining inventory to employee’s salary, everything depends on the capital available with an enterprise. Lack of funds, not only seriously jeopardize the growth prospects of a company but puts a question mark on its survival. For smooth operations, capital infusion becomes imperative for businesses. To meet the financial requirements, a business enterprise looks to raise working capital through different means including business loans.