Why Managing Working Capital Is Important For Future Funding

The idea of working capital management is to ensure that a business can meet its ongoing operational costs and utilize its resources as effectively as possible. Read to know why managing working capital is important.

13 Jan,2023 11:14 IST 1396 Views
Why Managing Working Capital Is Important For Future Funding

In times of a financial crisis, most small businesses must contend with the issue of stretched finances that can hamper growth and even lead to disruptions. In fact, finance departments of companies that want to know if they can survive a tough financial crisis need to worry about two major variables—working capital and cash flow.

Cash flow measures the amount of money a company generates. Working capital, on the other hand, is the difference between a company’s current assets, which include cash or such assets that can be converted into cash within a year, and its current liabilities, which may include accrued expenses, payroll and accounts payable.

Working Capital Management

Working capital is calculated by taking out current liabilities from current assets. While current liabilities include payable accounts, taxes, wages and interest owed, current assets include inventory, cash and accounts receivable.

Working capital management focuses on ensuring that a company can meet its daily operating expenses and use its financial resources efficiently and as productively as possible.

The Importance Of Working Capital

Working capital is important because the money is used to fund the company’s operations and meet short-term obligations to employees, suppliers and creditors. These obligations could include interest payments and taxes.

Working capital money is used to fund business growth without taking on more debt. A positive working capital means a business will be able to withstand financial uncertainties and invest in short-term growth opportunities. A company with positive working capital can even take on more debt, as the lender would be assured of its financial health.

By analysing its working capital needs and maintaining a buffer, a company can make sure it has enough money to stock up on raw materials and make other plans to keep its business running smoothly and without any stress.

Assets and liabilities, on the basis of which working capital is calculated, are on the company’s balance sheet, which is one of the three primary financial statements that a company produces—the other two being the cash flow statement and the income statement.

A company has positive working capital if its cash accounts receivable and other liquid assets are enough to cover its short-term obligations that may include accounts payable and short-term debt.

On the other hand, a company has a negative working capital if it does not have enough current assets to cover its short-term financial obligations. Such a company may not be able to pay its creditors and suppliers and may also be unable to find enough resources to fund its growth.

Business Loan For Working Capital

When a business falls short on working capital to meet all its needs, it can go in for a business loan, in order to make good the deficit, so that processes can keep running smoothly.

A business loan can be collateralized or uncollateralized, depending on the terms that have been agreed upon between a lender and the owner of the business that seeks to borrow the money. The business loan can serve as a sort of short-term bridge loan, to help the company tide over a crisis that may have arisen.

Conclusion

As a business owner you should strive to achieve a positive working capital for your business and should remain fiscally prudent to keep processes running smoothly.

But if you do run short of working capital and must avail a business loan to fund your working capital needs, you should ideally approach only a reputed lender.

Good, established lenders will not only offer you the best interest rates but also several value-added services that can make the process of availing and repaying the loan a seamless one.

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