The net working capital (NWC) represents the difference between the current liabilities and the current assets of a company. Simply put, working capital is the funds which a company requires for all day-to-day operations.
Working capital is a measure of the operational efficiency, liquidity and the short-term financial health of the company. The net capital is a deciding factor to business prosperity. A positive capital indicates the company’s potential to grow. On the other hand, negative working capital can be indicative towards financial mismanagement.
A number of NBFCs offer hassle-free working capital finance to make it easier for small businesses to meet their daily operational requirements in case of a shortfall.
All the details regarding working capital and available loan opportunities have been discussed below.
Calculating net Working Capital Formula
Net capital can be calculated by using the working capital formula, viz. –
Net capital= Current assets – Current liabilities.
Current assets include the account receivables, inventory and other various assets which are available to be liquidated.
Current liabilities include the wages, accounts payable, taxes and the current payables of long-term debts.
Working Capital Loans
Working capital loans are a type of loan that businesses use to cover their everyday expenses. These expenses can include things like paying employees buying inventory or keeping the lights on in their offices. Unlike other loans that are used to buy big things like buildings or equipment working capital loans help keep a business running smoothly from day to day.
One important thing about working capital loans is that they are usually short-term loans. This means that businesses typically need to pay them back quickly often within a year. Because the money is used for immediate needs these loans can help businesses get through tough times or take advantage of new opportunities without waiting to save up enough cash.
Another key point is that working capital loans can come from different sources. Some businesses may go to banks for loans while others might use online lenders or even borrow from friends and family. The terms of these loans can vary including the interest rates and repayment schedules so businesses need to choose the option that works best for them.
It is not always possible to maintain enough funds or asset liquidity to cover all day-to-day operational expenses. Some businesses rely on cyclical sales and therefore do not have enough cash year-round.
In such situations, it is, therefore, best to rely on financial advances. A loan can help make sure that business never runs out of working capital. Therefore, even when the revenues are down, the businesses can still carry on with their daily operations instead of coming to a stand.
What follows are the most common queries regarding working capital loans answered.
Qus 1. Why avail a loan?
Any business can face issues regarding cash flow. In such times, it is better to rely on working capital loans for their finances. NBFCs such as Bajaj Finserv offer such loans without any collateral along with additional benefits such as flexible tenors, nominal interest rates and also makes repayment affordable.
Qus 2. How can loans help strengthen a business?
These loans can be used without increasing one’s financial burden. And in return, it provides an individual with the funds to take care of daily operational costs and liabilities even during off-seasons or periods of low returns. As a small business owner, you should know how loans help keep small businesses alive by providing them with timely financing options which are easy to repay.
They can help in the following ways:
- Manage sales fluctuations
- Maintain cash flow
- Prepare for future bulk orders
- Leverage business opportunities
Qus 3. What are the requirements?
The eligibility criteria for such loans generally are given below:
- Age limit: 25-55 years
- The business should be at least 3 years old
- There should be income tax returns filed for 1 year
Some financial documents may need to be submitted which are helpful for the lender to understand the repayment abilities of the business.
Even though there may not be any present problems with the business, there will be lean periods at times, when there may not be sufficient available cash to cover any unplanned expenditure or delayed payments. A loan in such times can help the business get over the financial crisis and run without any complications.
Using the working capital formula, one can find out the requirements needed, and if required one can avail a loan.
NBFCs like Bajaj Finserv provides opportunities for any business to avail a loan of up to 30 Lakh without any collateral and at affordable interest rates. This ensures that small businesses can refer to such financial aids when needed without any difficulties.
Loans exist to ensure that an enterprise can thrive through any financial shortfall, that they can meet their short-term or long-term goals against a slight increase of their financial liabilities. Therefore, the best way out of a sudden financial crisis for a business is with a business or working capital loan.
Components of Working Capital
Working capital consists of two primary components:
1. Current Assets – These are resources that can be converted into cash within one year. They include:
– Cash and Cash Equivalents: The most liquid assets, such as bank balances and short-term investments.
– Accounts Receivable: Money owed by customers for goods or services delivered on credit.
– Inventory: Raw materials, work-in-progress, and finished goods that will be sold.
2. Current Liabilities – These are short-term financial obligations due within one year. They include:
– Accounts Payable: Money owed to suppliers and vendors.
– Accrued Expenses: Unpaid wages, taxes, and other operational costs.
Strategies for Optimizing Working Capital
Optimizing working capital is important for any business. It helps ensure that a company has enough money to cover its day-to-day expenses while also allowing for growth. Here are some strategies that can help businesses make the most of their working capital.
First managing inventory is key. Businesses should keep track of how much stock they have and what sells quickly. By reducing excess inventory companies can free up cash that can be used for other things. Using systems to monitor stock levels can help avoid overbuying and ensure that products are available when customers want them.
Second businesses should focus on accounts receivable. This means making sure that customers pay their bills on time. Sending out invoices quickly and following up with reminders can help speed up payments. Offering discounts for early payments can also encourage customers to pay faster which helps improve cash flow.
To maintain a healthy working capital balance, businesses can adopt the following strategies:
1. Efficient Inventory Management – Implement just-in-time (JIT) inventory systems to reduce excess stock and storage costs.
2. Accelerating Receivables – Offer discounts for early payments, enforce strict credit policies, and use invoice factoring.
3. Extending Payables – Negotiate longer payment terms with suppliers without damaging relationships.
4. Short-Term Financing – Utilize lines of credit or trade credit to bridge cash flow gaps.
Conclusion
By understanding its components, significance, and management techniques, companies can enhance liquidity, reduce financial risks, and position themselves for long-term success. A well-balanced working capital strategy not only sustains day-to-day activities but also supports strategic growth initiatives, making it a cornerstone of sound financial management.
