How To Determine Your Working Capital Needs

  • As a business, your working capital is one of the most important things you’ll need to keep running, and it is different for different businesses. This is because the requirements for all types of businesses may not be the same. Therefore, you have to understand what working capital is before you can know how to calculate it for your needs.

     

    What Is Working Capital?

    Your working capital is essentially the cash you have available to manage the day-to-day operations of your business. It can be calculated by subtracting your current liabilities from your current assets.

    Your current assets are those assets that can be easily liquidated, i.e.; can be exchanged for/converted into cash quickly. Your liabilities, meanwhile, are debts and obligations that you need to pay off within the year. The amount left when you subtract these two is your working capital.

    The amount of readily available working capital your business has, shows how well your company can meet its short-term obligations. It is a measure of your company’s overall financial health and shows its operational efficiency.

    Why Is Working Capital Important?

    There are many reasons why your working capital is important, including:

    1. Smooth Running Of Your Business: You will need to spend money to buy raw materials, overhead expenses, and for the payment of wages and salaries. All this, along with your day-to-day expenses. Your working capital will help with this and ensure an uninterrupted flow of production.

    2. Goodwill: If you have the capital, you can make prompt and timely payments (of your bills, EMIs, salary, etc.). This assures goodwill from your employees, lenders, and any other business you associate with. Lenders will also be more likely to sanction loans if you have a good working capital.

    3. Ability To Deal With Unexpected Expenses: Having a good/ positive working capital means your business will be able to meet any unexpected expenses or situations.

    How To Calculate Your Working Capital Requirements?

    Calculating your exact working capital needs is difficult, but you can find a rough estimate of how much you need, if you consider the following:

    • Your industry of operation

    • Your business growth rate

    • The stages of your business cycle

    Of these, your business/ operating cycle is the most important. Your operating cycle includes the following:

    • The time it will take to receive your payment (accounts receivable)

    • How long it will take to sell your inventory

    • When you will be able to pay your suppliers (accounts payable).

    You can subtract your accounts payable from your accounts receivable to get your working capital.

    However, you will need to have an idea of which stage you are at, to calculate the working capital you need at a given time. For example, a situation in which your inventory is already with your customer, but they haven’t paid you is one where a positive working capital comes in handy. Here, you can use the money to pay the suppliers who demand their money, before you have received yours.

     

    Obtaining Extra Working Capital Finances

    Sometimes, the working capital generated by the company internally is not enough. In such a situation, there are many options for working capital finance available, e.g., NBFCs like Bajaj Finserv offer working capital loans up to Rs. 30 lakh for all your short-term goals.

    These loans have flexible repayment options and come at competitive and affordable interest rates. What’s more, you can even apply for it online!