Managing working capital is essential as it finances everyday business operational activities. It is the difference between the current assets and liabilities of an organization.
Working capital management is essential for an organization’s financial health and day-to-day operations. An indication of good business management is the capability to utilize working capital to strike a balance between profitability, growth, and liquidity.
Entrepreneurs planning to establish their enterprise must have a detailed knowledge of working capital management and the methods of improving it to take their business to the heights of profitability.
Importance of managing working capital
Irrespective of the business’s size, the significance of working capital management is always high. Many profitable businesses are shut down due to the inability of paying their financial liabilities on time.
Considering such scenarios, every business needs a well-framed working capital management strategy. Following are some of the reasons why working capital management is essential for any business.
Improvement in credit profile and solvency
While generating revenue, when an enterprise diligently pays off its financial dues, it shows that its operation management is highly efficient. When a business assures that its operating cycle is adequately funded, it increases its credit score.
On the contrary, if the business entity has lower operational expenses but does not repay its dues on time, it negatively impacts the credit score. Borrowers must know the importance of business credit score as it is one of the essential determinants that lenders consider while sanctioning a business loan.
Meets liquidity crisis
If a business possesses substantial working capital, it has higher liquidity and can efficiently pay off its financial dues on time. It restricts the business from shutting down and prevents losses. Moreover, it will enable them to survive the financial crisis and restore business operations like before.
Any business entity willing to expand its business needs substantial working capital to finance different business requirements. It is required to purchase raw materials, equipment, fund purchase orders etc. Without adequate and increasing working capital, it is difficult to expand the business scale.
Besides, effective working capital management also ensures short-term profits and improves work culture. Though, during the initial days of business, owners struggle to manage working capital.
Following are the ways how they can significantly improve it:
File proper invoicing
It is essential to initiate invoices for your debtors and receive payments from them on time. If the invoices are collected on time, it ensures that the cash resources and funds are not stretched, and there are adequate funds to maintain business operations effectively.
Reduce additional expenses
Business owners need to know the effective strategies for restricting additional expenses as working capital loans require EMI payments. Therefore, borrowers can list all the expenses and make a sound repayment plan to avoid financial strain.
Know about working capital management
One of the simplest definitions of working capital is how a business entity develops its receivables and payables in the best possible way to generate profitable financial results. The chief strategy of managing working capital in a business is paying off the short-term financial liabilities on their stipulated dates.
If the working capital is higher, the business entity needs to earn more profit to ensure the necessary return on the employed capital. While discussing working capital management, one needs to be well aware of overtrading and overcapitalizing.
Most young business owners depend on business loans to avail sizeable credit as working capital for their new enterprise. However, borrowers need to understand how effectively they can utilize these funds and improve working capital management.
Reputed financial institutions like Bajaj Finserv are leading the race regarding working capital loans and business financing. Now borrowers, which capital is known as working capital, can avail working capital loans from these NBFCs at affordable rates to finance their day-to-day business operations.
Moreover, eligible business owners can also avail of pre-approved offers on various financial products, such as personal loans, business loans, credit cards, etc. These offers reduce the hassle of loan documentation and simplify the application process. Prospective business owners can check their pre-approved offers by submitting their names and contact information.
Thus, efficiently maintaining working capital management will allow business owners to avoid financial crises in their business. Further, borrowers need to be strategic while obtaining funds not to impact their creditworthiness in the long run.