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  • How to Determine Your Business Working Capital Needs?

    Published on December 18, 2018

    Business owners (especially small-business owners) face many challenges on a day-to-day basis. And one of the biggest challenges they come across is the problem of cash flows. Businesses depend on selling products and being paid. But in the real world, things may not go according to the plan. Customers may delay payments; suppliers may shorten their payment terms and so on. This is where working capital appears. Working capital is the money used by a business to fund its day-to-day operations. It is calculated as the current assets minus the current liabilities. As a company, you need to determine your working capital needs to run smoothly and efficiently. If you need a working capital loan, you may want to consider a leading financier such as NBFCs to supplement your company’s financial needs with a much-needed boost. The lender offers up to Rs.30 lakh as working capital finance at an attractive interest rate. You can get the loan by meeting the simple eligibility criteria and submitting only 2 documents. You can know your pre-approved business loan offer from NBFCs and get an instant approval on your loan.

     

    Here are a few ways to determine the working capital needs of your business:

    Operating cycle

    In business parlance, operating cycle is the amount of time taken by a business to purchase inventory, transform the stock into sales and generate a profit for the company. The operating cycle is a useful tool to estimate the amount of working capital your company will require to sustain and grow.

    A company with relatively small operating cycles require less cash to maintain operations. However, if your business has a large operating cycle, you would need sufficient working capital to run the company without hiccups.

    Here’s an example to consider. Imagine you run a tyre manufacturing company. You buy rubber from certain suppliers to produce tyres and sell to customers. You pay your creditors and take care of different costs with the earnings from sales. But what if your customers delay their payments? Your creditors are demanding money but you don’t have it yet. This can result in a cash-crunch situation. At such times, working capital is necessary to continue the business successfully.

    Nature of your business

    The quality of your business plays a vital role in your working capital needs. Almost every industry requires short-term working capital at some point or the other during its operations. However, the requirements can vary for different companies. For instance, businesses that have a physical inventory would require more working capital compared to service-oriented businesses. For example, a company selling raincoats and umbrellas needs to have sufficient working capital to fund the inventory of these goods before the sale in the rainy season. Otherwise, the accounts receivable build-up can choke the finances of the company.

    Growth and expansion

    Your business may be running smoothly now. But working capital needs may arise when you plan to expand. This is why you need to understand the current and future needs of your business. You don’t want to be caught unprepared exactly when you plan to grow and expand. Negative cash flow can seriously impediment your plan for growth.

    Emergency situations

    What would happen to your business if your biggest customer went out of business or chose a different company? Events like this can significantly affect your finances. This could lead to a load of inventory that you have not yet sold. But you would still have to make payments to your supplier. You need to plan for contingency situations to avoid an unexpected cash crunch.

    You can protect your business from significant cash flow challenges by taking a working capital finance. This cash inflow can take care of the different short-term operational needs of your business.

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