Importance Of Having A Good Amount Of Working Capital
What Is Working Capital?
Working Capital ensures the business has sufficient cash flow to meet its short-term obligations and operating expenses. It is suitable for:
- Paying wages/salary
- Buying raw material
- Clear outstanding payments
- Emergency expenses
Effective management of working capital includes managing cash, inventories, accounts receivables and accounts payable.
When To Opt For This Loan?
Working capital should be availed when:
- To avoid gaps in cash flow
- Seasonal fall in revenue
- To cover maintenance cost
- Managing inventory
- Minor expansion project
- Inadequate cash reserves
- To exploit new opportunities
Additional Read : Everything You Should Know About Working Capital Loans
How Does Having Enough Working Capital Help A Company?
The primary objective of working capital is to meet your regular financial obligations. In addition, it provides flexibility to invest in business growth and function without any delays.
a. Strengthens Solvency:
Helps the firm operate without any financial problems. For instance, it helps the company purchase raw materials, pay salaries and any overheads without delays. Without sufficient working capital, paying off debts or meeting operation expenses could get difficult.
b. Improved Credit Profile:
A company with sufficient working capital does not default on its operational payments. This indicates a company’s credit profile. When you need a loan in the future, your credit worthiness will be considered. Building a good business credit using your working capital will help you in the long run.
c. More Profits:
The better you manage your working capital, the better your profits. Companies may have to pay suppliers a down payment or token money before getting deliveries. They may also have to pay the supplier before the company receives payments for its products. Thus, lack of funds could lower the manufacturing capacity and profits. With a higher working capital, companies can accommodate more orders that can then lead to higher revenues and profits.
d. Smooth Functioning of Business:
With sufficient working capital, you can regularly supply the raw material. You could also pay the suppliers on time thus ensuring that your expenses and liabilities are met. Thus, your firm produces output without interruptions. Timely disbursement of employee salaries will help your business run like a well-oiled machine.
e. Ability to Face Crises:
Businesses are prone to seasonal fall in revenues. During this period, working capital can help you handle the crisis in effective manner.
Types of Working Capital Loans
- Loan by current or a new supplier
Loan against Fixed Deposit
- Pay Interest only on overdrawn amount
- Interest rates higher than lenders prime rate
Account Receivables Loan
- Based on confirmed sales order
- Suitable for completing order
Factoring or Advance Loan
- Based on credit card receivables in future
- Ideal for new businesses without credit history
To sum it up
Working capital loans are ideal for generating capital and building a sustainable business.