Considering the significant role that working capital plays in the functioning of an organization, it is essential to have an in-depth idea about arranging for working capital finance. From the starting of every business, it becomes necessary to deal with the working capital so that in future you do not have to arrange funds or financing solutions for your business, once it reaches its peak level.
The present time witnesses Indian businesses delaying their payables to fund their working capital needs. It has a negative impact on the EBITDA (Earnings before interest, tax, depreciation, and amortization) of the margin of a company in the long run.
Since working capital indicates an organization’s ability to meet the short-term expenses and thereby its operational efficiency, calculating the same is essential. With this transparency, a company’s liquidity standing is highlighted, and so are its shortcomings.
How to calculate working capital?
Ensuring the availability of adequate working capital finance is a mandate considering that it helps your business stay agile. The calculation of this requires individuals to have an enhanced idea about its various components that include –
- Current assets – Organisational assets may comprise inventory, cash, payment due to be paid by debtors, expenses paid for in advance, etc.
- Current liabilities – Liabilities for any business includes debts owned by it. It includes taxes, outstanding payments to be made to partners or vendors, salaries, short-term debts, etc.
Calculating working capital requirement for your business requires using the below-mentioned formula –
Working capital = Current assets – Current liabilities.
The working capital figure can be either positive or negative, depending on the financial standing of the company in the discussion.
Working capital indications
Considering that prospective and existing entrepreneurs have now a better understanding of working capital, based on the WC figure, they can now make informed decisions about where to deploy their funds.
All that they need to do is look into their outcome and draw an understanding of their strengths and shortcomings.
- Negative working capital – It indicates that the company has fewer current assets than current liabilities, and hence there are numerous corporate financial risks involved. In such cases, an organization needs to rely on stock issuances or to borrow financial assistance from reputed lenders.
Under such circumstances, it would be ideal to approach leading NBFCs like Bajaj Finserv that offers its Business Loans at an attractive rate of interest. With a Flexi loan facility to ease the repayment procedure and make it an interest-only EMI payment, the financial aid is ideal for those in substantial debt.
Borrowers also have the added financial leverage of pre-approved offers that ease the application process to avail financial assistance. Such offers are available on several financial products that include business loans, home loans, personal loans, etc. You can take a look at your pre-approved offer by providing a couple of essential details that include your name and contact number.
- Positive working capital – Having a positive working capital indicates that the company in question can financially cover its short-term liabilities.
Nevertheless, it is essential to have an optimal level of working capital to ensure that the company is neither –
- Incapable of meeting its short-term liabilities, nor
- Has unused or unsold inventories or uncollected accounts receivable.
This optimal WC is often calculated to be 20 to 100% of the organisation’s total current liabilities and is categorized into two concepts.
Types of working capital
Working capital is essential in the functioning of any business, irrespective of type. Both of these are crucial to the smooth running of a business –
- Gross working capital: Total fund invested in current assets is called gross working capital.
- Net working capital: The excess of current assets over current liabilities is termed as net working capital.
Since the working capital finance is crucial in sustaining the operational functioning of any company, it is imperative to have a detailed understanding of its calculation. Make sure to check in on the working capital ratio to ensure the smooth running of your business with nominal financial hassles. It is as important as the arrangement of finance for your business, timely analysis and forecasting with the help of working capital ratio can save you from future outbreaks.
