Working capital determines a business’ liquidity levels and helps an enterprise manage day-to-day expenses. Working capital is the determiner of the businesses’ short-term financial position, measuring the organizations overall competence.
It is fundamental to ascertain the financial status of a business. An optimal working capital management potentially enhances the financial stability and profit margin of a business, helping business professionals make vital investment decisions. Adequate working capital helps balance liquidity and profitability, helping business enterprises achieve consistent growth.
Importance of working capital in a business plan
Working capital is integral to the proper functioning of business operations that help a business flourish in several ways:
- Stabilises revenue fluctuations
Businesses of cyclic nature are affected by economic fluctuations. Working capital bridges the revenue gap when sales are low, helping them meet financial liabilities even during the off-season or lean periods.
- Maintains an organizations reputation
Enterprises with steady cash flow are considered trustworthy and carry a good image, helping them get contracts and strengthen business relations. In the modern business landscape, everyone is resorting to organizations which have a good market reputation and are credible.
- Helps earn short-term profits
Positive working capital enables businesses to keep extra funds aside and use them in short-term investments. With robust management of these extra funds, business enterprises can make short-term profits.
- Aids in making business plan
Another notable importance of positive working capital is it aids business bodies in decision-making. A proper analysis of the requirement of working capital and its effective management provides business bodies with an upper hand to manage the residual funds and decide on the amount to save. The right evaluation of the funds’ usage helps conveniently clear off existing obligations.
Insufficient working capital will make it difficult to tackle urgent monetary needs and lead to a complete shutdown of the business. Hence, individuals must emphasise the mistakes to avoid when managing working capital for business.
In this regard, falling back on a working capital formula equal to current assets minus current liabilities will help business professionals get an idea of the company’s liquidity and financial health, preventing them from running out of working capital.
- Enhances creditworthiness
The availability of working capital enables business enterprises to make timely payments to vendors, establishing their creditworthiness. Moreover, it makes them trustworthy, helping them obtain credit options like a business loan or working capital loan.
Business loans are ideal credit options that help meet the working capital requirement of businesses. It stimulates steady cash flow in a business. However, opting for a loan amount, borrowers must know how much working capital does their business needs.
A business loan extends adequate financial support to those in need of financing their ventures, helping them recruit staff, expand their business premises, purchase new inventories, etc.
In order to reap the following advantage, applicants need to know the important checklist before applying for a business loan.
Moreover, business professionals can reap the benefits of pre-approved offers extended by leading financial institutions like Bajaj Finserv. These offers accelerate the lending process and are available on various financial products like business loans, personal loans, credit cards, etc. Willing individuals can check their pre-approved offers by submitting their names and contact details.
To sum up, working capital is the driving force for small and medium enterprises, allowing them to meet short-term financial liabilities and plant growth. It is a critical business metric that determines business potential to meet short-term debts.
To sum up, working capital is pivotal in determining the business’s financial health and growth. Adequate working capital shows that the business is stable enough to invest in other business requirements. A holistic view of working capital helps one plan business funds.