Working capital is an important indicator of a business’s health because it determines how much money a business has to invest in its operation and growth.
Therefore, as a business owner, it is very important for you to understand the concept of what is working capital and its relevance in running your business.
What is working capital?
Working capital indicates a company’s liquidity levels for managing its day-to-day costs, including inventory, accounts payable and accounts receivable. It is computed by deducting current liabilities from current assets on the balance sheet.
It becomes simple to grow it through better company management when you understand the many types of working capital.
- Shorten the operating cycles
Shortening your operational cycle may enhance cash flow by transforming production and retail money into cash faster. The longer this process takes, the bigger the risk of non-payment and the effect on your working capital.
Asking for advance deposits or full payment upfront, shortening credit terms, and sending out bills as soon as a sale is made are all ways to speed up your operating cycle and get more working capital. You may also look into sales forecasting and demand planning.
- Reducing the amount of bad debt
Bad debt may arise in any company that provides trade credit. You may reduce bad debt to boost working capital. You may accept more orders and provide better conditions to clients to get an edge over the competition.
Selling more high-margin items or raising margins helps reduce bad debt and free up working capital. It’s also good to improve credit management and recover payments more quickly. Reducing inventory, readjusting stock levels, and managing logistics are all strategies that may be used to fight bad debt.
- Avoid using working capital to finance the company’s fixed assets.
Fixed assets, such as buildings, equipment, vehicles, or land, are owned or planned by every company. If you know what working capital is, you will understand that these assets are employed to promote long-term growth.
Selling a fixed asset can increase cash flow and working capital, but you should never pay for a fixed asset with your working capital. Fixed assets are costly, so paying for them depletes operating capital and raises the risk profile used to establish creditworthiness. Long-term loans or leasing are better ways to fund fixed assets.
- Reduce wasteful spending
Increasing working capital by cutting costs is another strategy to boost liquidity. Most of the time, companies can save money by carefully looking at their variable costs and looking for ways to cut costs or spend less.
As an alternative, you may be able to save money by negotiating with your suppliers to get lower prices or by negotiating discounts with your vendors.
- Financial support from banks or NBFCs.
To increase your working capital or to manage your expenses, you can also avail of an unsecured working capital loan from leading lenders and NBFCs. This working capital loan helps you with quick funds to manage your urgent working capital expenses. One of the leading NBFCs, Bajaj Finserv, offers unsecured working capital loans with simple eligibility and minimal documents.
