Authored ArticleBusinessEconomy

Working capital is the capital of a business

Net operating working capital is a measure of a company's liquidity and refers to the difference between operating existing assets and managing current liabilities.

By Avdhesh

Working capital is the capital of a business used in its day-to-day trading operations, calculated as the current assets minus the current liabilities. Net operating working capital is a measure of a company’s liquidity and refers to the difference between operating existing assets and managing current liabilities.

The need for Working Capital Management:

Efficient working capital management is an essential component of sustainable growth. If a company runs out of money for running its day-to-day expenses, the production of goods and services will eventually stop. In such an instance, the business will fail to cater to its existing customers and henceforth fail to acquire new ones. To restart production, the company will then tap into the company capital. While this step may offer a temporary respite, it will affect long-term stability by exposing assets and equipment acquisition and maintenance. Therefore, it is essential to have a well-structured working capital management system to assess the company’s working capital requirements realistically, giving the managers and business owners enough time to develop a solution.

Why is working capital so critical for any business? The main reasons for working capital being important are: Enhances solvency: Working capital helps to meet short-term expenses, including purchasing raw materials, paying salaries, and meeting overhead costs. Some of these payments cannot delay. Having enough liquidity helps the uninterrupted flow of production; thus, maintaining the solvency of a business.

Increased goodwill:

When a company can promptly meet its regular expenses and pay salaries, creditors for their costs and supply of goods, On-time, generate enormous goodwill and confidence in service providers’ minds, not just internally with employees but also with suppliers distributors.

Uninterrupted supply of raw materials:

Quick payments ensure a regular supply of raw materials. The inability to pay suppliers can result in production coming to a standstill.

Cost advantages :

Timely payments or early payments help a business entity negotiate well, buy at a highly competitive rate, and create substantial competitive advantages over its competitors in the market, leading to increased revenue and profitability.

Improved ability to face any crisis:

Apart from business operations’ smooth functioning, working capital liquidity ensures that any financial emergency can be handled with ease. A business that has enough cash can cushion itself against unforeseen situations. Thus, working capital financing defines a company’s financial health and how smoothly it can operate under different circumstances.

Issues faced by MSMEs regarding working capital: MSME is a strong contributor to the Indian economy, but at the same time, these enterprises or small business still faces challenges in accessing working capital. RBI’s recent report says that the MSME sector has witnessed two significant challenges – demonetization and introduction of Goods and Services Tax (GST). The introduction of GST led to an increase in compliance costs and other operating costs for MSMEs, as most of them brought into the tax net. However, the MSME sector faces operational problems due to the business’s size and nature and is, therefore, relatively more susceptible to various shocks to the economy. It is partly due to the weak creditworthiness of micro and small enterprises (MSMEs) in the country. Due to their weak economic base, they find it difficult to take financial assistance from the commercial banks and financial institutions. They are generally the last in the value chain to pay. MSMEs have no legal fall back for recovering dues as their reserve wholly invested. They depend on the working capital for any other expenses, causing balance sheet mismanagement as the statutory contributions remain pending. It can affect the company’s CIBIL score.

Why is a working capital loan an effective solution?

It is essential to remember that cash is king. It means that money (cash) is more valuable than any other form of investment tool. Assets and liabilities management is one of the most important things for business owners. Small businesses should drive a perfect balance between the assets and liabilities to carry on their daily operations effectively. They don’t have the capital to take up massive losses. Appropriate working capital management is required to avoid any bankruptcy. Insufficient working capital points to red flags in the company’s operations. When you need to find working capital for your business, an excellent way to give yourself extra support to meet your obligations is a working capital loan. Working capital loans are loans explicitly used to finance the everyday operations of a business.

The cash that you don’t have to cover your short-term obligations can compensate with a working capital loan. These loans designed to pay for short-term expenses and are generally quickly approved. These business loans need to handle operational costs and make smart investments in the near term. Non-banking financial institutions are leading the race when it comes to working capital loans and financing. There is a simple reason for this, Peer Peer lending platforms (P2P) file www.omlp2p.com have developed products and services which cater exclusively to the needs of small businesses; meaning, it is easier than ever to apply for a business loan, the verification process is quick and hassle-free, and the loans are approved faster. www.omlp2p.com is one of the RBI’s registered NBFC-P2P. It provides a technology-enabled e-commerce platform to its Lenders and Borrowers to avail their loan at a highly competitive Rate of Interest, in a hassle-free manner without many documents; at the same time, it provides its Lenders Higher return on their capital by providing opportunities to lend to sound quality, well-assessed borrowers. The author, Mr. Avdesh, is a team member of www.omlp2p.com. The article written by him is in his capacity and educational in nature. All the views are his personal views were shared with Prittle Prattle News personally.

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