Working capital is the fund necessary for a business to meet its regular expenses like rent, utility bills, wages, etc. It is calculated by subtracting the company’s current liabilities from its current assets.
The current liabilities include expenses like accounts payable, income tax, account overdrafts payable, accrued expenses, etc. On the other hand, current assets include accounts receivable, cash in hand, inventory, short-term investments, prepaid expenses, etc.
The two major types of working capital are given following:
1) Gross Working Capital
Gross working capital consists of the total current assets of a business.Current assets are defined as assets which can be converted into cash within a year.
2) Net Working Capital
Networking capital is the difference between current assets and current liabilities.
Other than the above, there are also variants of working-capital based on time:
3) Temporary Working Capital
Temporary working capital is the funds required for specific demands arising in particular occasions. It is also known as variable or fluctuating working capital.
Temporary working capital includes the following:
- Seasonal Working-Capital – The funds required to meet seasonal demands.
- Special Working-Capital – The funds needed to pay for particular expenses of a business. For example, marketing research, product launch, product promotion and advertisement,market expansion, etc.
4) Permanent Working Capital
Permanent working capital is among the most vital different types of working capital. It is the minimum funds that a business requires to pay for its daily expenses. It is also known as fixed working capital.
Permanent working capital includes the following:
- Regular Working-Capital – The minimum amount of funds required to convert current assets into cash.
- Reserve Working-Capital – The funds kept in reserve as a contingency for regular working capital. Reserve working capital comes into effect in case of unforeseen circumstances like inflation, strikes, etc.
These include some of the types of working capital.
Now,let’s take a look at some of the ways to manage it.
10 Essential Ways to Increase Working Capital:
1) Managing Working Capital
Ensuring proper working capital management by optimizing key performance indicators (KPIs) is one of the ideal ways to improve it.
2) Defining Reorder Level
Defining reorder level will help a business replenish its inventory. It is in line with supply chain management. Reorder level is critical to ensure the production cycle’s continuation, which improves working capital.
3) Controlling Expenses
Controlling all the expenses and minimizing the unnecessary ones can increase working-capital.
4) Clearing Debts Quickly
Paying off creditors quickly may seem unintelligent. However, doing so can help a firm negotiate prices and receive discounts.
5) Collecting Accounts Receivable
Providing clients with a due date is an ethical business practice.
6) Refrain from using Working Capital to Fund Fixed Assets
Business owners can take a short-term loan to fund fixed assets instead of using working capital.
7) Compare Interest Rates
Comparing interest rates before opting for a loan is essential to improve working capital.
8) Business Loan
Taking a business loan is another superb way to increase working capital. Bajaj Finisher, a renowned NBFC in India provides Business Loans with pre-approved offers. Pre-approved offers reduce the time taken for availing funds with a simple procedure.
9) Inventory Financing
Business can receive financing against their inventory in case the working capital is low. Inventory financing is a secured loan where the inventory acts as collateral.
Lender scan provide either the total value of the inventory or a lower amount as the loan.
10) Accounts Receivable Financing
Account receivable financing is almost similar to inventory financing. Here,businesses use the accounts receivables invoices as collateral to take a loan. The loan amount can be equal to or lower than the total invoice amount.
If you want to start your own small business then you must know how to get finance for small business in India. You can also start mostprofitable manufacturing business in India.
Accurate working-capital management is vital for expansion and smooth organisational functionality. A business can easily and quickly increase all the types of working capital mentioned above with these simple steps and habits.
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