If you are already in the line of business, then you may know that running a company has to be all about being proactive and efficient in all of its domains. However, if you’re planning to start a new one, you must grasp some critical areas like focusing on strategic planning, business drafts, workforce and above all the working capital, etc. and make your financial tasks more stable and convenient. This article is going to break down the concept of working capital, for a better understanding and develop the significance of keeping a positive working capital.
The working capital of a business is the amount used for day-to-day expenses, calculated as current assets minus the current liabilities.
Current assets include cash and account receivables which are the outstanding amount, yet to be received from your customers. Whereas, current liabilities are the account payables which comprise of the money you owe to your suppliers. If you have more assets than liabilities, meaning, your net capital is positive, you are considered to be in a favorable condition. But if this net calculation is cynical, it means you owe more than what you have, and that is not a functional status to have.
Now that we have developed a holistic idea about working capital and the background of it, the following article is going to establish why working capital is essential and why you should be vigilant about keeping it positive.
Attracting Investors
No matter what the side goals of a business are, the core and most important goal of companies is to achieve the highest point of profit maximization. Of course, it depends on the kind of business you are working in, but this is the ultimate goal among all. You are not resourceful enough to finance your business from scratch and make it skyrocket by yourself. You need investments to help you. Now, you must realize this as well that requiring investments is not only limited to the beginning of your business’s life. You need these investments throughout the cycle of your business. Investors, although, have enough money but they don’t just invest in any company that comes to them. They do a complete background check and follow a protocol. Working capital is one of the main things they look into before proceeding with a loan. They need to be sure of what you currently have and have to pay back. If you keep a positive working capital, you will attract investors, pushing your business to new limits and beyond.
Routine Payments
Whether you are running an elite business like a multinational company or you are just a national or domestic company, you need to have enough funds in your regular everyday account to pay for daily operations. Every business has monthly payments such as food bills, renting some equipment or utilities. The organization pays for it and consumes the working capital amount. You don’t need to write checks and go through lengthy procedures to withdraw cash for daily activities. So, you must have enough of the working capital to cater to these payments. Also, having cash on hand saves time.
Unexpected Expenditure
Being in business has always been a risky venture. There is nothing entirely predictable and guaranteed. It always leaves room for uncertainty, and you can always take some measures to mitigate or minimize it, but there is still a possibility that what you are preparing for may or may not happen. Also, something you are not preparing for can come your way, as its always astutely advised to keep extra funds or cash in cases of emergencies or unexpected situations. That is why a certain amount should always be present. This way, you will deal with the losses efficiently and timely. Managing it well can make you skip taking working capital loans.
Less Dependence on External Aid
As we have already established that businesses need their investments to grow and thrive. These investments or debts help them flourish. Sometimes, the business owners are unable to bear the financial assistance required; however, securing investments, aids, or even loans is not an easy task. You have to apply for these opportunities and give gazillion presentations to convince your investors of your potential and whatnot.
Moreover, the time needed to process all of these applications and approvals is quite long. So, sometimes you need something better than the mainstream investments. Here, you can use your savings to save your business and make it grow. You have the liberty to use your working capital, and the plus side is that you are not under the scrutiny of your investors, making it easier for you to allocate the money where you find the best options available.
Competitive Advantage
Making your business survive in a saturated market with a cut-throat competition is not less than art and skills combined. Having a competitive edge over your rivals and competitors is what businesses strive for these days. Your customers have options and a plethora of options. You have to show your credibility to them to convince them by providing them with excellent records and profits and savings. If you are saving more than your working capital, it means that you have the edge over your rivals of spending lesser for the same thing. You have reduced costs and, in turn, you have economical and more affordable prices which are attractive to your customers.
All in all, businesses are hard to manage but keeping your goals focused and achieving a positive working capital, will bring your business success. The significance of positive working capital cannot be left behind, and it must always be addressed to secure profit maximization.
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