Understanding the Importance of Net Working Capital for Your Business
Working capital is a financial metric that to a great extent represents how much operating liquidity is available to an enterprise. It constitutes a part of operating capital. Any shortage of this fund may lead a business into a potential loss.
Unfortunately, it is mostly the small and medium-sized businesses that suffer that most due to lack of working capital at the time when they need it the most.
Therefore, every business owner should understand the importance of working capital as well as net working capital and its life-cycle to run their business successfully.
What is net working capital?
While a significant amount of business revenue remains trapped into payments receivable, it cannot sit for the time till when customers make the payment. Thereby, it is the working capital that helps in carrying out all the operational costs related to business.
On the other hand, net working capital has a more specific role to play in identifying the available liquidity of a business. An enterprise can have two kinds of working capital, positive working capital and negative working capital. While a positive working capital denotes that fact is that a particular company is running in profit, a negative working capital indicates precisely the opposite.
However, to determine that one needs to calculate the working capital considering all accounts.
How to determine net working capital?
The first step to calculate net working capital of an entity requires identifying the current assets and liabilities of the same. Both these aspects are measured in 12 months period. Current assets refer to all the goods that a company possesses, including the payment receivables in the short term.
On the other hand, current liabilities refer to all the debts of a company, including payment to a dealer, supplier, financial charges, taxes, etc.
Following expression helps in calculating the net working capital.
Net working capital= Current Assets- Current Liabilities
If the result comes in negative, the company need to resort to borrowing funds.
How to maintain a healthy net working capital?
Only calculating the net working capital does not help a business grow; it requires a concrete strategy. The following are ways to maintain sufficient net working capital.
Resolving the debts
A business involves several short- and long-term debts that with time can pile up to a major financial burden. Therefore, business owners should ensure that they are repaying the debts immediately so that later they don’t use the net working capital to repay the loans. To make the process less complicated, they can start with the small debts that are comparatively easier to handle.
Nonetheless, if a situation comes when a company needs to repay the debts using working capital, its owners should check the financial standing of the same. As a matter of fact, the primary usage of working capital is to ensure uninterrupted day-to-day activities.
Apart from clearing the small-term debts, it is also vital to seek financial assistance to keep the business moving. In this regard, a collateral-free working capital loan or a business loan can be a life-saviour. Availing these resources, you can ensure the smooth operation of your business.
Top financial institutions like Bajaj Finserv offer working capital loan and business loans worth up to Rs.20lakh with an affordable rate of interest. Using this fund, one can address the shortage of working capital funds.
They also extend pre-approved offers to hasten the loan approval process. Besides business loans, these offers are available for other financial products as well, including personal loans and so on. All you have to do is prove your name and contact number to check your pre-approved loan offer.
Apart from learning about the net working capital, you should also develop a clear idea about how much working capital your business needs to perform the necessary business activities as well as cover any emergency.