Finance teams aim at two important measures to understand whether their company is capable of handling unexpected problems: cash flow and capital. Such measures clarify how healthy your company’s finances are.
Working capital is vital in every business for day-to-day operations, planning growth, and meeting short deadlines.
Let’s decode working capital and have a detailed analysis of why working capital management is essential for the growth of the business.
What is Working Capital?
Working capital is what is left after you deduct your liabilities from your current assets. The assets can range from cash, inventories, and any account receivables. The liabilities can include any short-term loans and account payables. Working capital can tell the financial health of your company. Too much debt is definitely not a good sign. Similarly, too much of assets also do not indicate a healthy financial ecosystem.
When your company has more assets than liabilities, it is a positive working capital. On the other hand, if there are more liabilities than assets, it is a negative balance.
What is the importance of working capital for the growth of a company?
Having enough working capital helps manage the business effectively. Take a look at some of the importance of the company’s growth:
- Funding growth: With positive working capital, organizations can plan for growth without being solely dependent on additional debt.
- Meeting obligations: A company with sufficient working capital can easily pay its suppliers, employees, and short-term expenses.
- Reputation: Positive working capital is a key to boosting a company’s image and reputation, thus making it more attractive to potential clients and partners.
- Improve creditworthiness: Having a positive working capital improves the chances of borrowing money when needed.
- Smoothing revenue fluctuations: Adequate working capital helps businesses meet financial obligations even during periods of lower revenue. This is especially common in seasonal industries.
- Short-term profits: Companies with excess funds can invest them in short-term opportunities that can help generate additional profits.
- Handling unexpected expenses: A favourable working capital can help you avoid situations like cash shortages, especially when unexpected expenses arise.
What are the benefits of using working capital to finance your growth?
When you use working capital for business growth, it brings amazing benefits to businesses.
- Better financial control: Monitoring working capital closely means monitoring overall finances. This helps and empowers leaders to make more informed decisions and predict performance more accurately.
- Enhanced operational efficiency: Good management of working capital is the key to enhancing other business operations, thus making them more efficient.
- Adaptability to market changes: You do not need to raise funds separately for specific projects. Businesses using working capital for growth purposes can quickly adapt to market changes.
How to increase the working capital?
Here are some of the following ways of increasing the working capital of your organization:
- Make operations efficient: Look for and fix any problems in your business’s operation. This can save you money and enhance your working capital.
- Be careful with credit: Make sure to review all credit policies before extending them to customers. Only offer the credit when you think it is appropriate. Make sure the customers pay on time so you can manage your accounts receivable more effectively.
- Change your debt: Consider changing the method of paying back loans. This will allow you more time and ease the pressure on your working capital.
- Manage inventory: Clear out extra or cold stocks by maintaining your inventory at the right levels. This can help you free up money that is tied up in inventory.
- Get short-term money: Research the best short-term loan option to get extra cash for your business.
- Sell illiquid assets: Sell assets that are difficult to turn into cash to boost your business’s cash flow.
- Automate the receivable process: Use automation to smooth out your day-to-day business. It will help bring in more cash and reduce the need for extra funds.
Conclusion
Businesses can easily get working capital loans. These are instant personal loan app that lenders offer to meet daily business operational expenses. Professional and verified lending apps are a perfect platform that offers quick working capital solutions tailored to meet businesses’ daily financial needs. These apps can help enterprises to bridge the gaps of temporary cash flow.
