Working capital: its role in a business’ success
As a businessman, you want to plan well. You ensure you have adequate resources to meet your monthly expenses. You create an eco-system that supports regular income for your business. You push your people to work hard to deliver goods or services on time. You push your clients to make payments on time. Yet, there are times when you face unexpected expenditure. The working capital stress thus created makes you borrow money or delay payments. Such events can disrupt even a well-settled business.
What is a working capital?
The fund that a company utilizes to cover their day-to-day operations is known as a working capital. It can even be defined as a measure of a company’s short-term financial health. It can also be viewed as a company’s available liquidity.
Where is the working capital utilized?
The working capital can be used for
- Paying for short-term expenses: Working capital can be used for crediting salaries, buying office supplies, petty cash usage and so on. If you are working in a rented office, working capital can also be used for paying the rent. Most of these expenditures aren’t avoidable. Meeting these expenditures would help build your goodwill amongst the employees, suppliers and distributors.
- Buying raw materials: The quality of the raw material is inevitable to develop a quality product. The raw material quality on most instances is interlinked with the price. Without the handy working capital, you might need to compromise on the raw material quality. Also, suppliers could hesitate to supply the raw material to small businesses. Even if they supply, they could have unrealistic credit periods. Thus, if you default on the payment, you stand a chance for a complete shut-down. Thus, for a continues supply of raw materials, having sufficient working capital is a must.
- Ability to tackle unexpected situations: As a business, you need to be prepared to tackle the unexpected expenditures. A sufficient working expenditure ensures that an unexpected financial crunch may be tackled with ease. In fact, a high working capital would even equip you against unfavorable weather conditions, order rejections and unavailability of resources.
Mistakes to avoid while planning your working capital
On most occasions, a working capital crisis is caused by improper planning. Many business owners believe that current month’s income can fund the next month’s payment. This is a faulty practice as anything can go wrong. You need to plan at least a month ahead.
Also, because desperate times calls for desperate measures, many companies delay payment to suppliers. This would result in a bad reputation and you could lose out on a good distributor.
Where can you quickly get working capital?
While you can easily miscalculate the working capital, it is comparatively easy to obtain working capital. You can get your working capital using the following options.
- Personal loan: This is an unsecured loan that can be sanctioned within minutes. You can use the money for all purposes including as working capital.
- Loan against property: If you own a property, you can easily mortgage it for a loan. You can get up to 70% of your property value. The usage of this type of loan is also unrestricted.
- Business loan: Business loans are your best options for working capital. Like personal loans, they are also unsecured loans. However, they usually have a lower interest rate.
- Professional loan (if applicable): If you are a doctor, engineer or chartered accountant (CA), then you can apply for a professional loan. This is a special type of business loan. The advantage being that the lenders recognize your profession and may sanction a higher amount of loan.
To sum it up
Working capital is the amount that can be used for all daily, weekly and monthly expenses. While working capital is an easy candidate for miscalculations, it is also readily available using a loan.
To know more about the business loans by Bajaj Finserv, click here