Meaning and concept of working capital – Explained

Working capital (WC) is required for you to finance your firm’s day-to-day expenses, short-term debts – thus, helping your firm to continue operations. It fuels your firm regardless of its size and indicates that all processes are running smoothly. 

Hence, to ensure that your company has sufficient liquidity for meet its short-term obligations, working capital management comes into the picture. But, before understanding how it works, take a look at the ins and outs of working assets. 

What is a WC?

It is the measure of a business’s current assets against current liabilities. The difference between these two is your working capital. 

• Current assets – Those assets which are convertible into cash within a year falls under current assets. It can include debtors, inventory, and prepaid expenses.
• Current liabilities – These refer to the short-term debts which your business might incur in the course of operation. It includes outstanding expenses, short-term loans, etc.  

What is WC used for?

Here is how working capital helps to keep your business agile –

1. Maintain an optimum level of inventories.
2. Meeting day-to-day business expenses. 
3. Pay overhead cost and salaries.
4. Bear the expense of raw materials. 
5. Maintain a cash reserve.
6. Finance your business expansion. 
7. Maintain a sufficient cash reserve. 
8. Tackle unforeseen expenses. 

Working capital management ensures that these business operations are conducted in the best possible manner. 

Businesses may face shortages in working capital due to several reasons, downturn being one of them. In such cases, you can consider opting for advances from financial institutions to boost your business. For instance, you can avail a Business Loan from lenders like Bajaj Finserv. You can procure up to Rs. 30 Lakh and use it to:

1. Expand your business operation  
2. Invest in the infrastructure 
3. Increase working capital for streamlining the day-to-day expenses 
4. Upgrading to the latest equipment
5. Maintaining inventories and much more.

Furthermore, these advances have been made affordable by Bajaj Finserv through:

1. Low rate of interest 
2. Instant approval of loan amount and fast disbursal of the sum
3. Flexible repayment period 

Here is how you can apply for a business loan to keep your business afloat. Keep in mind to check the eligibility criteria and documents required before applying for the credit facility. Use a loan eligibility calculator of your preferred lender to determine your eligibility for the loan amount.

How to calculate the working capital needs?

For determining it, you must take these following metrics into account:

1. Nature of business 
2. Scale of operation 
3. Time taken for converting the inventories into revenue through sales
4. Percentage of credit sales 
5. Differences in demand and supply in case of seasonal businesses 
6. Emergency reserves 

To ensure that working capital cycle stays dynamic, these metrics need to be calculated periodically.  

Types of WC

The different types of working capital and its various approaches are as follows –

 

Balance sheet approach

 

• Gross venture capital is the money you spend on your firm’s current assets.
• Net venture capital is the current liabilities subtracted from the current assets.

 

Operating cycle approach

 

• Working assets varies from business to the other. The lowest working asset for a financial year is taken as fixed or permanent. It is the amount you must invest in your working capital. 
• The difference between the net venture capital and fixed or permanent working asset is your temporary or variable working assets. 

Reserve capital

 

 

This acts as an emergency reserve needed to deal with contingencies and remedy any damages incurred.

 

Special working assets

 

This capital is set aside to fund a specific activity. For instance, you decide to open a second office or develop new product line-up. 

With this information on working capital management and concept of working assets, you can perform your business optimally and achieve growth. Make sure to opt for financing at the right time to ensure your frim stays operational.