The financial capacity to fulfil short-term business obligations is essential for a company’s long-term survival. Working capital finance ensures you have enough funds to stay afloat while covering your regular expenses, even during tough times. It also finances growth objectives to facilitate business expansion without compromising quality and obligations. While the concept of working capital is simple, managing it properly can be complicated. In the following sections, we will address what working capital is and why it is so important for a small business.

What is Working Capital?

In simple words, working capital is the business capital that a company utilises for its everyday operations. It represents the available assets you can instantly turn into cash to cover your short-term expenses like purchasing equipment, inventory, raw materials, managing equipment, paying utility bills, and distributing salaries. The net working capital measures a company’s liquidity by finding the difference between its current assets and liabilities.

The formula to calculate working capital is current business assets – current business liabilities.

The Significance of Working Capital Management

Effective working capital management is important for a company’s sustainable growth. If a business runs out of cash to cover its day-to-day expenses, its production will eventually cease. In such a case, the company will fail to serve its existing customers and acquire new ones. Tapping into the business capital finance may provide a temporary respite to restart production but will impact its long-term stability. Therefore, having a well-structured working capital management plan is important. It can practically assess the company’s financial requirements and give it enough time to find a suitable solution.

Why is Working Capital so Important for a Business?

Here are a few major reasons why working capital is so important for small businesses:

• Better Goodwill: When an SME can promptly pay salaries and fulfil its obligations, it creates goodwill in the market, not only among employees but also among distributors and suppliers. 

• Higher Solvency: Sufficient working capital helps a company meet short-term obligations, such as purchasing inventory and raw materials, paying salaries and utility bills, and covering overhead expenses. Keeping some of these expenses on hold is not possible. Therefore, a company must have enough liquidity to ensure a constant production flow, thus enhancing business solvency.

• Uninterrupted Access to Raw Materials: Regular, timely payments ensure a constant supply of raw materials from suppliers. Delaying supplier payments interrupts the influx of raw materials, bringing the production process to a standstill. 
• Financial Benefits: Early or timely payments give more negotiating power to business owners, giving them a competitive advantage in the market. It eventually leads to increased profitability and revenue. 
• Ability to Face Crisis: Besides smooth business functioning, working capital finance also ensures a better capability to handle financial crises and emergencies. Working capital cushions businesses against unforeseen circumstances, maintaining their liquidity even during low seasons. Thus, working capital measures a company’s financial health and capacity to operate smoothly under various circumstances.

How is Working Capital Finance an Effective Solution?

Cash is undeniably the king in the business world, meaning money has more value than any other investment tool. Efficient working capital is one of the most significant factors business owners should take care of. SME owners should strike a perfect balance between assets and liabilities to carry out their daily operations smoothly. However, if you are falling short of funds, consider borrowing a micro Business Loan as additional support to meet obligations and avoid large losses.

Working capital finance refers to specific loan types businesses use to finance their everyday operations. It can compensate for the lack of finance to cover short-term obligations and pay for expenses without any collateral requirement. It is exactly what a company needs to handle operational costs and make smart business investments for long-term growth.

Tips to Improve Working Capital

Managing cash flow to fuel your operating cycle is easier said than done. Here are a few techniques that help:

• Shorten your operating cycle – the process of converting money tied with sales and production into cash.
• Finance fixed assets with Business Loans to generate long-term growth.
• Perform background checks on new clients and suppliers to avoid late suppliers and tax liens.
• Purchase accounts receivable insurance to protect against non-payment of accounts receivable. 
• Cut unnecessary expenses to uncover saving opportunities and enhance assets. 
• Reduce bad debt or uncollectible receivables to enhance your working capital and ensure timely growth.

Working capital finance can be an efficient hedge against financial crunch and increase working capital. Compare micro Business Loan plans to receive a lower interest rate and fulfil your funding requirements. Structure your business finances efficiently, prepare revenue generation, and take appropriate actions to protect your savings and build working capital to ensure business growth. Make an efficient repayment plan and build a credit history to receive prompt finance and achieve your business goals.