Role of Working Capital

Around 17.89 lakh registered companies are present in India as of 2018. However, only 66% of such businesses are still functioning, while the remaining has ceased operations due to substantial losses.

Analysis and Forecasting of Business Plan

Such losses primarily accrue to the irregularities in the production process, which leads to insufficient revenue generation.

Adequate finances have to be injected in such companies to meet the net working capital requirements, which, in turn, would boost the production and sales of the company. 

Role of working capital finance –

The working capital of a business represents the liquidity status of a company, along with its annual turnover. Firms must ensure they never run out of working capital.

Funds under net working capital are utilised in purchasing raw material and subsequent items for smooth production of final goods for sale. Revenue collected after-sales minus all bills payable represents the total profits generated by the business for the stipulated period.

Net Working Capital also represents the goodwill of a business in the market, as it establishes the speed with which a company churns out revenue by utilising the existing funds. Such capital also demonstrates the excess amount of current asses available with a company (NWC = current assets – current liabilities).

Since working capital is a measure of the liquidity capacity of a business, it demonstrates the ability of a company to face any adverse situation prevailing in an economy. Such unforeseen circumstances often put a dent in the production process of companies having low working capital as they do not have the necessary funds to procure raw materials.

Adequate working capital finance allows companies to meet all such requirements with ease, thereby allowing them to remain at the previous production level.

Nonetheless, companies often face a shortage of current assets required to finance their daily operations. To compensate for such lack of funds, companies often avail unsecured business loans to meet all current liabilities facilitating a smooth production process. Individuals can easily manage working capital for trading business through such business loans respectively.
Financing net working capital needs

Upon understanding what is working capital and its importance, entrepreneurs should look into the various sources of funding the same.

Business loans

Major financial institutions such as Bajaj Finserv offer unsecured business loans of up to Rs.30 lakh to fund such working capital needs of a business.

Their Flexi Loan facility is also extended, which effectively reduces the EMI payments by up to 45% through reduced interest burden. Under this policy, individuals can withdraw only the amount required by them at any interval out of the total limit sanctioned. Interest is only levied on the withdrawn amount for the initial tenor. 

Trade creditors

Entrepreneurs often establish a secure line of credit with their suppliers to avail raw materials at a predetermined date at no charges. Payment for is usually made at a later date, after the sale of the final product in the market.

Such advances obtained can be utilised to meet all working capital needs of a business. Upon sales and subsequent revenues generated, individuals can repay all their current liabilities quickly.

Efficient net working capital management through credits at attractive interest rates allow businesses to realise high profits in the short run, through reduced cash conversion cycle.

Such short-run gains play an essential role in future growth and development of the business as well. Higher revenues generated in the short run can be reinvested to find all expansion and business development projects, which, lead to growth in the future