Managing working capital is a critical component of running a healthy business. Working capital refers to a company’s liquid assets and the financing needed for day-to-day operations. Efficient working capital management ensures a business has enough cash flow to pay its short-term debts and operating expenses. This allows a company to operate smoothly and maximise profitability. Applying smart working capital management techniques can significantly improve a business’s cash flow.
What is working capital management?
Working capital management involves monitoring and controlling current assets and liabilities to ensure optimal liquidity. Current assets include cash, accounts receivable, inventory, and other assets that can be converted to cash within a year. Current liabilities are short-term debts, accounts payable, wages, taxes and other obligations due within a year. Working capital is calculated by subtracting current liabilities from current assets.
Effective working capital management maximises a company’s liquidity and minimises risks. This gives business leaders visibility and control over cash flow to meet operating costs, financing costs and outstanding debt obligations. Proper working capital management improves profitability, bolsters creditworthiness, and puts a company in a better position to capitalise on opportunities.
Key benefits of working capital management
Working capital management provides several important benefits:
- Maintains liquidity: Managing working capital ensures a business has sufficient cash flow to handle short-term financial obligations. This liquidity allows a company to operate smoothly.
- Optimises use of assets: Managing inventory, accounts receivable and payable improves efficiency and cash utilisation. Excess or obsolete inventory ties up cash unnecessarily.
- Improves profitability: Reducing excess assets and liabilities lowers costs and enables a business to retain more profit.
- Provides flexibility: Effective working capital management and liquidity allow a business to respond quickly to new opportunities.
- Strengthens creditworthiness: Demonstrating the ability to manage debts and meet obligations improves a company’s chances of obtaining financing and credit.
Techniques to improve working capital
Businesses can employ several techniques to optimise working capital:
- Implementing just-in-time inventory management to avoid excessive stockpiling. This reduces carrying costs.
- Offering discounts for early payment of invoices to accelerate cash collection.
- Using supply chain finance arrangements to extend accounts payable terms.
- Selling slow-moving inventory at reduced prices to free up cash.
- Using technology to accelerate billing, collections and payments.
- Preparing cash flow projections to foresee liquidity needs.
Acquiring working capital financing
Occasionally, working capital management is not enough to provide the liquidity a growing company needs. Businesses can obtain working capital financing in the form of business loans or lines of credit. The funds from these credit facilities can be used for daily operating expenses, financing inventory and paying suppliers.
Working capital loans from NBFCs generally range from Rs. 2,00,000 to Rs. 55 lakh. To qualify, companies need a strong credit history and consistent revenue.
The application process involves submitting documents that demonstrate creditworthiness. Once approved, the borrowed capital can be used to smooth out cash flow fluctuations and fuel growth.
Working capital management is a vital practice that gives businesses control over their short-term financial health and cash flow. Optimising working capital unlocks liquidity, improves profitability, and provides flexibility to act on opportunities.
Occasional working capital financing assists high-growth companies manage fluctuations. With proper working capital strategies, companies gain financial clarity and stability to build a prosperous enterprise.
Steady cash flow is essential for growth and flexibility in the fast-paced world of business. The Working Capital Loan is a simple-to-use financial instrument that can help strengthen the financial stability of your company.