Regardless of a business’ size, or its industry genre, working capital continues to play a significant role as a metric to assess its short-term financial health.
With India’s start-up base contributing to it being one of the major economies across the world, the working capital requirements are now at an all-time high.
Much can be attributed to the fact that working capital acts as the financial pivot for any business.
It is well substantiated by RBI’s new ‘Guidelines on loan system for delivery of credit’ that is expected to bring in a new approach in the way working capital requirements are assessed.
This move is an endeavour to ensure that working capital planning is streamlined and its limits are aligned to cash conversion cycle.
Subsequently, multiple businesses are aiming towards boosting their working capital to ensure smooth functioning of their day-to-day operations.
All that they need to do is have a comprehensive idea about what is working capital and how to calculate working capital and follow up on the same at regular intervals.
Calculating the working capital
Working capital is one of the primary metrics of a company’s current financial standing and represents its ability to pay off the current liabilities with its current assets. This liquidity calculation is essential for the vendors, creditors, and management considering that it represents –
- The company’s short-term financial health, and
- The management’s ability to utilise the available assets to its full capability.
Knowing how to calculate working capital and following up with the same over regular intervals ensures that entrepreneurs can invest optimally in the required avenues of shortcoming.
Here is a brief look into the calculation of the WC and its various aspects –
- Components
Working capital is indicative of the cash a company has in hand to fund for the day to day operational expenses. It makes it essential to ensure the business never runs out of working capital.
Given this, the components that are involved in the calculation of working capital needs are –
- Current assets – Resources under the possession of a company that can be used or converted into cash within a year. It includes accounts receivable, cash and equivalents, marketable securities, inventory, etc.
- Current liabilities – All debts and expenses that a firm is expected to pay within a single business cycle or a year (whichever is less). It includes the day to day cost of running a business, including materials and supplies, accounts payable, accrued income taxes, accrued liabilities, principal or interest payment on debts, etc.
- Formula
The formula to calculate the working capital requirement for your business –
Working capital = Current assets – current liabilities.
Implications of working capital result
The financial well-being of a business is reflected in the working capital result. It brings in two outputs –
- Positive working capital – Indicative that the company in question has adequate liquid assets to pay off short-term bills and finance the growth of their business, internally.
- Negative working capital – Reflects that a company isn’t being able to use its asset to its fullest potential and might sight soon be facing a liquidity crisis.
It is imperative to ensure that a business has access to adequate WC. In cases of deficits of such funding, eligible entrepreneurs can always approach leading financer like Bajaj Finserv and avail their Business Loans to meet their working capital needs.
Such financing options bring with it multiple financial leverages in the form of the high-value loan amount, attractive rate of interest, extended repayment tenor, etc.
In addition to these, the NBFC also brings its pre-approved offers that ease the application process to avail financial assistance.
With such financial assistance at your disposal, running out of WC would never be possible considering that you know how to calculate working capital and follow up on the same. Make sure to invest accordingly to strengthen your business roots.
