Working capital is essential for any business. This is because businesses need money to meet their short-term expenses. Some of these expenses include money to pay for raw materials, money to compensate employees, and money to pay for utilities and rent.
If you feel that your business does not have enough working capital to operate smoothly, then you can opt for a Working Capital Loan in India. It is a type of Business Loan that is specifically meant to facilitate the working capital requirements of a business.
If you’re not sure about how to calculate the net working capital of your business to know its liquidity, we’ve got you covered.
Items on your balance sheet which can be converted into cash within a year are known as current assets. Cash and cash equivalents (such as money market funds, commercial paper, treasury bills, etc.) are examples of current assets.
Essentially, current assets are those assets that can be used to pay for your business’s operating expenditures.
Suppose your business has cash worth ?24 Lakhs and inventory worth 60 Lakhs. This means that you have current assets worth ?84 Lakhs (?24 Lakhs + ?60 Lakhs.)
Current liabilities are those items on your balance sheet that need to be paid for within one year. Some examples of current liabilities include debt payable, payable accounts, employee salaries, and so on.
Essentially, current liabilities are your short-term financial obligations.
If you need to pay ?30 Lakhs every year to your employees and you have an annual debt of ?15 Lakhs, then your current liabilities are ?45 Lakhs (?30 Lakhs + ?15 Lakhs).
Your net working capital is your current assets minus your current liabilities. Hence, from the above example, your net working capital would be ?84 Lakhs (current assets) – ?45 Lakhs (current liabilities) = ?39 Lakhs (net working capital).
A positive net working capital indicates that a business has enough money to meet its short-term expenses. It is an indicator of the solvency of a business. If a business has negative working capital, then it means that the business will need to raise money through funding or acquire debt to meet its expenses.
If you have a negative net working capital or if you foresee that you will have negative net working capital in the future, then a good option to stay solvent is to avail a Working Capital Loan.
A Working Capital Loan in India is tailor-made to meet working capital requirements. You do not have to provide any security or collateral to avail such a loan. Further, you can take advantage of flexible loan repayment tenures which suit your business plan.
If you’re looking to increase your net working capital, then these tips might help.
Long-term assets do not count as current assets. This is because the value of these assets is spread out over a period of more than one year.
You may have long-term assets that are not being used. Suppose you have machinery that needs to be repaired and isn’t being used. You can have such machinery repaired and then sold for cash. This cash will then count towards your current assets increasing your liquidity.
Debt can account for a large portion of your current liabilities. A business may have lots of short-term debt such as credit card payments and lines of credit. It is possible to refinance such debt and turn them into longer-term debt. For example, you can take out a Business Loan which can help you repay your short-term debt such as credit card debt (which is usually payable every month).
Refinancing can help to ensure that you have fewer debt repayments that are due within one year. Hence, it can help you increase the liquidity of your business.
A business may find itself in a position where it has a lot of excess inventory. You can review your inventory to find items that can be sold in the short term. Even though inventory counts as a current asset, it is still not as liquid as cash. This is because selling inventory can be more difficult than spending cash.
So, if you find that you have excess inventory, then selling such inventory for a discount can help you meet short-term financial requirements.
Essentially, net working capital measures the ability of a company to meet its short-term financial obligations. If a company has excess working capital, then it means that it can not only meet its finances but also invest in its growth. However, a business should not have too much working capital because that can be an indicator that a business has a lot of excess inventory or is not investing its excess cash properly.
If you calculate net working capital and find that your working capital is falling short, then consider taking out a flexible Working Capital Loan in India to help you meet your obligations.
Financial planning is a dynamic process that involves careful thought, computation, planning, and execution. With fluctuations and downturns, the world of finance is ever-changing.
A personal loan is an unsecured loan. It lets you borrow funds from a lending institution without pledging any collateral or asset like an immovable property, a vehicle, or a life insurance policy. You can use a personal loan for various purposes
A Personal Loan is a type of unsecured loan extended to an individual for various purposes such as home improvement, debt consolidation, a significant purchase, or a financial emergency.
A basic understanding of how your repayment options are calculated is a must. By doing so, you can ensure your monthly borrowing won come as a surprise or force you to look for additional funding.