Working capital is essential to the smooth operation of any business. A well-managed working capital ensures the financial and operational success of a business and helps the business stay on the path of growth. One of the signs of a good business person is their ability to manage their working business capital to maintain a good balance between profit, growth, and liquidity.
Every business requires working capital for its daily operational needs like purchase of raw material, managing sudden expenses, paying salaries, and a lot of other day to day expenses. Effective working capital management helps in the smooth operations of a business and plays an important role in the growth of a business. It does so by ensuring that there is enough work capital for the smooth running of the business by minimizing the cost of capital being spent on work capital and increasing return on investments.
The net working capital of a business is calculated using the following formula:
Net working capital = Current assets – Current liabilities
Here current assets refer to those assets that can be sold for cash in less than a year and current liabilities refer to those short-term liabilities or debts that a business incurs during its operations like debts to creditors, outstanding expenses, and short-term loans. In short this is the answer to what is working capital management and its importance in the running of any business.
Finding out the working capital needs of a business is an easy process, all you need to do is keep the metrics below in account:
- Nature of your business
- Operating scale of your business
- Time taken to generate revenue from raw materials/inventory
- Differences in seasonal demand and supply in case of seasonal businesses like winter wear
- The percentage and terms of repayment of credit sales
- Emergency reserves
Sometimes, even with proper work capital management, business owners may fall short of work capital, as we all know running a business always involves risk. This is also applicable for new businesses that have still not set their foot in the market. In such cases, a work capital loan can come to the rescue of business owners and help them in managing their business expenses. Businesses can take up work capital loans that come with flexible repayment terms, and use them to fund their day-to-day operational needs.
By using a work capital loan, a business owner can focus on running the business instead of worrying about funds and once they manage to sell the raw materials/inventory, they can use that amount to pay back the loan. Work capital loans are of great help to small, seasonal, and new business owners who don’t have a large amount of assets or funds and are looking for collateral free business loans. These loans allow them to keep on running their business operations smoothly and work on growing their business operations.
One can easily avail of a working capital loan if they meet the following eligibility criteria:
- The business owner must between the age of 25-65 years and an Indian citizen
- The business must be operational for a period of minimum three years
However, the above-mentioned eligibility parameters are general and might differ from lender to lender. Leading financial institutions like Bajaj Finserv offer collateral free business loans of up to Rs. 45 lakhs at attractive rates of interest with minimal paperwork.