Working Capital: Why It is Important for A Small Business

A business can have various income sources, and efficient management of income can help foster its growth. Maintaining a steady cash flow becomes necessary for each business to remain afloat. In regard to this, working capital becomes essential for small business to expand their operations without any difficulty.

Understanding working capital management is, therefore, pivotal in planning a business’ operations and expansion.

What is working capital management?

It is quite easy for small business owners to manage working capital if they maintain a healthy balance between short-term assets and liabilities. An efficient working capital management guarantees that any company can run smoothly if it manages to repay maturing short-term debts and expenses that can arise in the future.

Working capital demands close supervision of business inventory, company’s account statement, etc. Hence, if small businesses fail to manage working capital proficiently, the company will fail to achieve success.

Importance of working capital in small business

Knowing everything about working capital will help small businesses to operate smoothly and increase the company’s earnings and profitability. The primary objective of maintaining working capital is to manage the business’ operating cycle.

Small businesses should maintain a sufficient balance between assets and liabilities to efficiently conduct their daily operations without hassle.

Issues faced by MSME

The MSME sector is a significant contributor to the Indian economy, but it faced several challenges due to demonetization and GST. The introduction of GST led to the increase of operating costs and other compliance costs for MSMEs as most of them were brought under the tax net. Thus, GST had a huge impact on working capital for small businesses.

Tips to improve working capital management

  1. Keep a check on your networking capital ratio

To avoid inefficiencies in business operations, owners need to keep a constant check on the working capital ratio with the formula below –

Working capital ratio = current assets – current liabilities

2. Improve business inventory management

If an individual is planning to avail of a business loan for his/her start-up or expand the existing business, it is crucial to maintain sufficient inventory. Inventory is one of the crucial factors checked by investors and shareholders to evaluate the operational efficiency and potentiality of a business. In this regard, digitized inventory management can help to curtail losses and interruptions in business.

3. Manage expenses

A stable cash flow is the primary accelerator of any business. WC is often affected when assets are engaged in things such as poor inventory management and unpaid invoices. To eradicate this issue, a business owner needs to go through the monthly subscriptions to determine the difference between wasteful and essential expenses.

4. Work with vendors who offer better deals

Establishing a good relationship with dealers or traders will help business owners avail of special offers and discounts and earn the vendor’s trust. Thus, if your business faces a cash flow crunch, your good terms with the vendor will allow you to receive some leniency.

Moreover, there are leading financial institutions like Bajaj Finserv that offer financial assistance to small businesses to resolve problems with working capital.

The NBFC also brings pre-approved offers that help to expedite and simplify the loan application process. These exclusive offers are available on several financial products such as personal loans, business loans, etc. You can check your pre-approved offer by entering your essential details, such as contact information.

Managing working capital efficiently and maintaining efficient cash flow will ensure a business’ profitability. To avoid financial complications and operational hindrances, the current assets should be significantly higher than the liabilities.