Working capital can be considered as one of the most important drivers of an organisation, keeping their current liabilities within an acceptable range and freeing up funds to comfortably meet financial requirements for everyday operations.
Having a deeper understanding of the components and management of working capital is essential to boost the vitality of a business, and ensure its steady growth for upcoming years.
Since FY 2015, Indian SMEs and MSMEs across the nation have steadily bridged their gross working capital gap, as per reports.
CRISIL’s analysis of almost 1700 MSMEs shows that organisations are slowly overcoming their economic woes and managing their financial standing effectively.
Studies conducted in 2018 showed that the average gross working capital cycle reached approximately 300 days in FY 2018, leading to a marginal spike in many company’s debts to equity ratio.
Experts contribute such improvement to better training, exposure to several essential business-related administrative skills, and working capital management skills.
It is widely understood that managing an organization’s networking capital effectively is necessary to increase a firm’s overall revenue. It’s also important to know what’s your working capital if it comes to a merger and acquisition negotiation. It will increase the value of your business by decreasing the capital required to run the operating cycle.
M&A-s can get really frustrating and you need to be well prepared, if you want to know more about them check out this Wall Street Prep guide.
How to Calculate Working Capital?
Working capital represents the difference between a business’s current asset and current liabilities.
Here Is How It Is Calculated?
Current networking capital ratio = Current assets / current liabilities.
This ratio is a good indicator of how much capital does a business need for its everyday operations. A ratio higher than 1 means the existing assets exceeds existing liabilities, which is a good indicator of a firm’s financial standing.
You need to understand certain components better to effectively calculate and manage the working capital.
- Current asset – Any and all assets which can be liquidated is listed under current assets. Both tangible and intangible assets including property that can be liquidated into cash within a business cycle, is considered as a current asset. Note that current assets are and should be the primary source of working capital.
Usually, current assets include marketable securities, checking and savings account, account receivable inventory, and other funds.
These do not include long-term investments, such as real estate, collectables, etc. It is also referred to as gross working capital for balance sheet analysis.
It is necessary for every organisation to appropriately manage its current assets so that the organisation always maintains steady financial standing to meet ongoing liabilities.
- Current liabilities – Current liabilities include the expenses a business is likely to experience, as well as all debts that it is liable to pay within a business cycle or financial year, a standard time period to measure the life cycle of working capital. It includes all costs involved in running a business, such as taxes, payable accounts, utility bills, materials and supplies, etc.
Increasing Business Revenue by Maintaining Working Capital
Having a high level of working capital indicates a well-managed company with better growth potential, as well as better operational efficiency, improved liquidity, and substantially improved profits.
There are several methods that allow an organisation to successfully identify sources of working capital and manage its requirements; let’s take a look.
- Maintaining a capital cushion – Only a handful of businesses enjoy a steady inflow of cash throughout a financial year. Maintaining a fund to finance operations during slower business cycles is essential to preserve working capital and continue production.
Firms can also opt for business loans if they need emergency monetary backing during an emergency. Such credits are offered by several institutions, including NBFCs like Bajaj Finserv, to eligible customers.
Track Your Work with work tracker, what is it?
a work tracker is an app that records all the time you spend on every work task. You can set it up as detailed as you want, applying task names for the tasks you want to track.
Bajaj Finserv also extends pre-approved offers to existing customers that simplify the application process and help save time. Such offers are available on both secured and unsecured credit, including business loans, personal loans, etc.
- Factoring receivable accounts – Companies can use receivables as leverage with financial institutions to offset net working capital requirements. In this case, customers pay directly to the financial institutions, and the firm will receive the same amount as an advance to maintain their working capital.
Effective working capital management can keep business agile, allowing it to grow at a steady pace without compromising with production, manpower, and overall revenue generation. Proper knowledge of the same is necessary to operate and expand the reach of a business.
Working capital is a determinant of an organisation’s liquidity and immediate financial standing. It is calculated by determining the difference between a company’s existing assets (properties that can be converted into cash within a short time span) and liabilities.
Networking capital is one of the key determinants to gauge a company’s financial health. An organisation with negative working capital is likely to face difficulty funding its operations, whereas a positive working capital indicates prospects of growth and generate better revenue in years to come.
Companies can follow several methods to maintain a positive working capital ratio. Creating and maintaining a financial backup, preserving receivable accounts adequately, lowering the overall cost associated with the purchase, production and warehousing, etc.
All can contribute to lowering the overall capital dependency. Moreover, a business can also resort to availing business loans if they require emergency financial assistance to uphold their working capital.
It helps continue everyday operations, ensuring a steady inflow of revenue that helps businesses carry their products and services.
Every organisation should learn how to calculate working capital effectively, as it shows their financial standing and operational efficiency, based on which they can expand their operations and revenue stream without any issue.