Working Capital In Business Plan

What is Importance of Working Capital in Business Plan?

March 22, 2022 • 1587 views
Author: PoonawallaFincorp Category: Business Loan

Every business requires money to function. That is why it is said that it is sometimes referred to as the lifeblood of any business. The lifeblood of any business, working capital refers to the money available at your disposal to meet present and short-term needs. It refers to liquid funds in the form of cash or deposits that you keep for addressing daily operations. A critical business metric, working capital is also a measure of the ability of your business to pay short-term debts.  

What is Working Capital?

Working capital is the difference between the current assets of the business and its short-term debts & current liabilities. You must have a positive working capital as it demonstrates that the business’s financial goals are achieved, and your business is financially stable to invest in other business operations. The importance of working capital is high especially for small businesses as they rely heavily on short-term financing. This also increases the significance of working capital for such businesses. 

Working Capital Formula = Current Assets - Current Debt

How to Calculate Working Capital Requirement?

You can use a working capital formula to calculate the working capital requirement:
Working capital = Current Assets – Current Liabilities 
For example, a company has current assets worth Rs.5,00,000 and current liabilities worth Rs.2,00,000. So, the working capital of the company will be Rs.3,00,000. Using the above-mentioned working capital formula:
Rs.5,00,000 – Rs.2,00,000 = Rs.3,00,000
The working capital calculation is used for understanding the liquidity of the business. Similarly, you can find out the working capital ratio using the working capital ratio formula:
Working capital ratio = Current Asset/ Current Liabilities 
Using the above given example, where the current asset is Rs.5,00,000 and current liabilities are Rs.2,00,000. Your working capital ratio is 2.5 
Rs.5,00,000/Rs.2,00,000 = 2.5 

What is working capital management?

Working capital management is a business tool that ensures the best usage of a business’s current liabilities and assets for its effective operation. The sole aim of working capital management is to examine a business’s current assets and liabilities to maintain cash flow and meet the business’s financial obligations. It assists in addressing planned as well as unplanned expenditures and determining the business’s efficiency by maintaining liquidity. 

Also Read: Why Managing Working Capital is Important for Future Funding?

Importance of Working Capital

 Now that you know what is working capital all about and which capital is known as working capital, let’s understand the importance of working capital finance management. No one can deny the importance of working capital in a business. Therefore, we must do the working capital finance management to understand and manage the working capital in a business. So that the business can flourish without any problem. Its importance is not restricted to just one aspect. Doing so helps you to: 

Plan for Funds 

The very first importance of working capital finance is planning for funds. With a holistic view of your working capital, you can plan for funds accordingly. When you know the likely expenses to be incurred at present or in the future, you can chalk out the need for funds accordingly. If you are likely to incur a shortfall, then you can apply for an unsecured business working capital loan to overcome a cash crunch. 

Aids in Decision Making 

The second importance of working capital finance is that it aids in decision-making. An accurate estimate of your working capital and its management helps you and your finance team to appropriately manage the available funds and decide how much to spend in the near term. The right estimate allows you to save and pay off your obligations with the utmost ease. 

Improves Creditworthiness 

Another importance of working capital finance is that it improves creditworthiness. When you have adequately planned for your working capital, the same aids in timely payment to your vendor and lenders if any. This does not only strengthen relationships but also enhance your creditworthiness in the market. It helps you obtain a customizable business working capital loan to meet your fund requirements in the future. 

Builds Credibility 

Building credibility is another importance of working capital finance management. It’s through working capital that you pay your employees and vendors. Effective management of working capital helps you make timely payments to them, thus building your credibility. It also motivates your employees to go the extra mile for the organization and go beyond their call of duty. 

Also Read :- How Working Capital Loan Can Help Grow Your Small Business 

Different Types of Working Capital in Business

The importance of working capital finance in business planning is known to everyone and how working capital finance plays a crucial role in the business plan. While formulating a business plan, you must make adequate provisions to lay your working capital needs and identify its sources. While the sources could be cash credit, bill discounting, trade deposits, and notes payable, among others, the plan must also include the different types of working capital that are as follows: 

  • Permanent Working Capital: Also known as fixed working capital, it includes the minimum current assets that are required to keep operations running.
  • Variable Working Capital: This refers to the extra working capital that’s used for various operational expenses.
  • Reserve Margin Working Capital: As the name suggests, this capital is kept as a reserve for unforeseen expenses coming your way. This working capital helps you to meet liquidity needs in an emergency.
  • Special Variable Working Capital: It refers to the extra working capital that your business needs for fulfilling objectives such as launching new products, effectively managing risk, and undertaking marketing campaigns, among others.  

Need for Additional Working Capital

Sometimes, your business may require additional working capital. For example, you may need additional working capital to pay vendors and suppliers during peak business season. In such a scenario, you can avail a business loan for working capital. 

Such loans are also known as unsecured business Capital Working Loans as you don’t need to pledge any security to your lender. All you need to do is to fill up an application form and upload the relevant documents. Upon successful validation, the loan amount is disbursed and credited directly into your account. 

Frequently Asked Questions about Working Capital

What is capital in business?
Capital in business refers to the sum of all financial assets that are needed to produce business-related services and goods. These funds can be utilized to start business operations and meet daily expenses. Hence, the answer to your question- what is capital in business is simple. Working capital helps businesses to grow and expand. 

What is working capital management?
Working capital management is a business tool that helps businesses to make use of their current assets & liabilities and maintain an adequate cash flow to meet various business’s financial obligations. By managing working capital effectively, businesses can free up cash that would otherwise be lost on the balance sheet. To put it into simple words what is working capital management all about? Working capital management helps to improve the business’s profitability and earnings. 

The loan also comes in handy when you are undergoing a cash crunch due to non-payment from customers or experiencing a dip in business due to black swan events like the Covid-19 pandemic. The funds received help you to sail through tough times and meet your obligations. Poonawalla Fincorp offers a Working Capital Loan for business growth in a jiffy at a competitive rate of interest. Call us on our toll-free number 1800 266 3201 or write to us at customercare@poonawallafincorp.com to know more.

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