This mantra has played an important role in most successful businesses. Most businessmen focus on increasing revenue and profits, forgetting the cash flow issues that might kill the business. This makes the working capital one of the most important parts of any business. Let’s begin by understanding what is working capital and why it is important for small businesses to manage their working capital effectively.
Working capital is nothing but the net current assets that your business owns. It is a metric to calculate the short-term financial health of businesses. It depicts whether the business has adequate financial resources to meet its short-term financial liabilities. Following is the formula to calculate the working capital:
Net Working Capital = Current Assets – Current Liabilities
Having understood what working capital is, let’s understand how working capital issues arise. You start your new trading business wholeheartedly. You begin purchasing materials and start selling goods. However, your customers ask for a credit of 60 days while you have to repay your creditors in 20 days. So, even if you sold the goods on the very day on which you purchased them, you still will face a gap of 40 days. This is how most businesses face a working capital challenge. Let’s understand why working capital is important for small businesses.
Following are some of the prominent reasons and the importance of working capital management effectively:
Here’s how you can improve your working capital management in your business:
Managing working capital efficiently lays the foundation for any successful business. You can use the above tactics to understand the shortcomings in your business and take corrective steps to achieve peak efficiency.
In case you still face issues in managing the working capital, you can opt for secured business loans with IIFL Home Loans. With a 100% online process, you can enjoy a hassle-free customer journey in the business loan application process. The approval process is quite efficient and you can get loan approvals in just 30 minutes. Apply now to make your business efficient.
The following are the different components of calculating working capital in general:
The risks of poor working capital management are increased borrowing costs, damaged reputation, reduced profitability, and ultimately failure of the business.
The working capital is calculated by reducing the net liabilities from the net assets to know the net working capital.
Maintaining good relations with your vendors is crucial and therefore, you can consider availing business loans to pay your vendors.
You can minimize the working capital gap by reducing the gap between the time you receive payments from your customers and the time you release payments to your vendors. Further, ensure that your stock rotation is fast.
Disclaimer: The information contained in this post is for general information purposes only. IIFL Home Finance Limited (including its associates and affiliates) ("the Company") assumes no liability or responsibility for any errors or omissions in the contents of this post and under no circumstances shall the Company be liable for any damage, loss, injury or disappointment, etc. suffered by any reader. All information in this post is provided "as is", with no guarantee of completeness, accuracy, timeliness, or of the results, etc. obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability, and fitness for a particular purpose. Given the changing nature of laws, rules, and regulations, there may be delays, omissions, or inaccuracies in the information contained in this post. The information on this post is provided with the understanding that the Company is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. This post may contain views and opinions which are those of the authors and do not necessarily reflect the official policy or position of any other agency or organization. This post may also contain links to external websites that are not provided or maintained by or in any way affiliated with the Company and the Company does not guarantee the accuracy, relevance, timeliness, or completeness of any information on these external websites. Any/ all (Home/ Loan Against Property/ Secured Business Loan/ Balance Transfer/ Home Improvement Loan/ NRI Home Loan/ Home Loan for Uniformed Services) loan product specifications and information that may be stated in this post are subject to change from time to time, readers are advised to reach out to the Company for current specifications of the said (Home/ Loan Against Property/ Secured Business Loan/ Balance Transfer/ Home Improvement Loan/ NRI Home Loan/ Home Loan for Uniformed Services) loan.