For any business to run smoothly, some amount of capital is required to conduct day-to-day expenses. This amount is also known as Working Capital and is calculated as total current assets minus total current liabilities. For small businesses like SMEs and MSMEs, knowing what working capital is and how much they should maintain is essential. But first, let us find out what is working capital management.
What is Working Capital Management?
Working capital management is a business strategy or process that ensures that the working capital is optimally utilized. It is designed to ensure a business monitors its current assets and liabilities and optimizes the same for better operational efficiency. This is a vital process as it allows a business to improve its overall cash flow via optimum utilization of resources.
What’s more, due to the emphasis laid on proper working capital management, small businesses can opt for SME Loans that are specifically offered for improving their working capital. It is also known as a Business Loan for Working Capital. Additionally, it could also help them maintain adequate working capital for their business.
What is Adequate Working Capital?
Adequate working capital refers to a business having sufficient capital to run daily operations and still having some amount left for contingencies. Businesses need to maintain adequate working capital to be prepared for unforeseen financial challenges.
Also Read: Why Take A Personal Loan To Boost My Credit History?
Here are the best ways to maintain adequate working capital:
- Vendor Procurement – Knowing what kind of products you are sourcing, from where, and from whom can go a long way in establishing and maintaining a healthy relationship with vendors. Oversee the procurement process to ensure that your working capital brings quality products at the best value.
- Managing Inventory – Maintaining a comprehensive record of both new and existing inventory is important. This makes it easier to determine which items are essential and/or require more capital for further upgrades.
- Consistent Communication with Vendors – Effective vendor management includes consistent communication and timely payments. Keep updating your vendor database to ensure that you find the best deal and always have enough capital for payments.
Advantages of Maintaining Adequate Working Capital
Here are some of the top advantages you get from maintaining an adequate amount of working capital:
- Make Extra Purchases – With adequate working capital, you can purchase more and add to your inventory to meet demands during busy months. This will also ensure that your business remains well-stocked throughout the year.
- Focus on Maintaining Infrastructure – Conversely, maintaining adequate working capital can help you fulfil various financial obligations. This can be especially helpful during periods of low revenue.
- Regular Payments – You can use your working capital to fulfill debt obligations on time. Paying off your debts on time also improves your credit score. Additionally, this can help you in getting Business loan for MSME at attractive interest rates to expand your business.
- Timely Payment of Salaries/Wages – Your workforce runs your business, so, it is important to make sure they get paid on time. Maintaining adequate working capital can help pay off the salaries/wages of workers without delays, increasing goodwill among employees and improving productivity.
- Leverage Favorable Market Conditions – If you maintain adequate working capital, it becomes easier to take advantage of trade discounts in favorable market conditions. You can purchase in bulk at low prices and maximize your inventory.
- Invest in Infrastructure Upgrades – Maintaining an adequate amount of working capital could allow you to upgrade certain infrastructure when required. This will ensure regular upkeep of machinery and better efficiency overall.
- Business Expansion – An adequate working capital can also allow you to expand your business operations or business reach. You can even go one step further and opt for a Working Capital Loan to spearhead business growth.
SME/MSMEs should maintain an adequate amount of working capital to accomplish essential as well as regular operational tasks. It is integral for these businesses to run smoothly and efficiently as they represent the backbone of the national economy.
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