Preface

Managing working capital effectively is one of the vital fundamentals of any entity to overcome unexpected crises and unpredicted or predicted downs - working capital significantly impacts a company’s financial health. Positive working capital is a sign of healthy business management and simply reflects that the company manages its profit, productivity, growth and liquidity well. 

As a business owner, one knows the importance of working capital in the ecosystem and how positive working capital can withstand challenges and possess the flexibility to invest in further growth after meeting short-term obligations.

One underrated saying about working capital is that it helps in effective decision-making. Thus, in today’s discussion, we’ll scrutinise the significance of working capital and how it is helpful in constructive decision-making - Stay tuned!  

Working Capital - Explained 

Every company, whether small or big, requires sufficient cash flow to run out its operations and manage its cash flow smoothly within the organisation. If we talk about it from the accounting perspective, the difference between current assets and current liabilities is working capital. This difference amount is used to fulfil the daily financial needs of an entity for smooth functioning like the making of recurring payments, covering unexpected costs and purchasing of primary materials used in production. 

Must Read: Types of Working Capital - Benefits & Factors 

Accounting formulae 

The difference between total current assets and current liabilities is working capital. 

Working Capital = Current Assets - Current Liabilities 

Importance of Working Capital 

Positive working capital is the prime requirement of any business - the need varies from business to business; a good working capital management strategy results in high productivity and profitability. Even some famous, productive businesses shut down due to poor management and the inability to pay off liabilities. Following below is analysis of why working capital is essential.  

Management of Liquidity 

After adequately inspecting income, expenditure and payables, the finance and accounting team can effectively plan funds, after evaluating working capital businesses get a clear financial position of themselves, or else liquidity issue may impact the brand image and the company’s operation.  

Value Addition 

One company that has positive working capital will make timely payments to its vendors; on the other, a company that doesn't manage its working capital will definitely fail to make timely payments; those companies having adequate and timely payment structures will definitely have a goodwill and premium image in the market. 

Helpful in earning short-term profits 

For those companies who have excess funds, on evaluation, it was found that their current assets ratio is higher, which simply means a company has more funds than required. In that case, excess funds can be invested to earn profits.

Enhances decision-making  

More money leads to effective decision-making, and positive working capital helps make a sound impact; one can calculate day-to-day funds requirements and short-term obligations. 

Positive working capital adds to business and enhances the entity in achieving big organisation goals. 

Improves Entity’s credit profile  

If a company purchases its equipment or raw material on credit, it must be repaid within the prescribed period. When businesses ensure that the operating cycle is efficiently funded, it directly amplifies the credit score. On the other hand, companies with low cash reserves may fail to make payments on time, which will decrease their market creditworthiness.  

(If you are low on funds, take Working capital Loan using OneNDF at the lowest interest rate with fast approval and disbursals. Get in touch with them today!)

Strengthen the work culture of the corporate. 

On-time payments of all expenses to vendors and timely payments of salaries to employees create a motivating environment within the office that will lead the employees to work harder. 

Get ahead of competitors. 

In straightforward terms, access to more money will definitely take you ahead of your competitors. Also, effective management of finances will let you sell the products and services at costs lower than others.

Easy Ways to Increase working capital 

In the following points above, we have understood the importance of working capital and why it is necessary to have a positive one; now, read and know how one can increase their working capital.

Take working capital loans. 

If you have less or negative working capital, apply for easy working capital loans using OneNDF; contact a finance expert, mention your number and wait for a callback. OneNDF is associated with India’s leading lenders, including top banks and NBFCs; to date, they have disbursed an amount worth more than 2000 crore. 

Try to sell Ill-liquid assets.

Selling Illiquid assets or cash equivalents will directly improve the cash position within the business. 

Reduce unnecessary expenditure 

Financial efficiency can be achieved if an entity reduces its expenditure wherever it is possible; saving costs or making expenses whenever required will greatly impact the long run. 

To Conclude, 

The article above has been a guide defining the importance of working capital in the business ecosystem; regardless of big or small, every entity needs working capital to effectively manage its operations and ongoing expenses. We have intensely scrutinised the top 7 essential and impact measures that working capital makes on the entity and discussed the different ways to improve the same. Most importantly, positive working capital enhances effective decision-making and lets the company make big decisions. 

Suggested Read:

Top 10 Instant Personal Loan Apps in India

Top 10 Tips to Increase CIBIL Score 

Different Types of Debt Instruments 

The Importance of Working Capital: Frequently Asked Questions 

What are the two essential aims of working capital?

• Maintenance of working capital operating cycle 

• Ensuring ordered operation 

What is the importance of working capital?

Crucial for covering short-term expenses and meeting obligations. It must be managed carefully as it is a good indicator of a company’s financial health. 

What are the sources of working capital?

• Share capital 

• Retained profit 

• Long-term loans 

• Debentures

• Tax provisions 

• Public deposits 

• Cash credits 

What are the types of working capital?

• Net working capital 

• Regular working capital 

• Gross working capital

• Reserve margin working capital 

• Permanent working capital 

• Variable working capital 

• Special variable working capital 

• Seasonal variable working capital