Running a business requires diligent financial planning and management. One of the most important aspects of business finance is understanding your working capital needs and working capital requirements. This article will explore what these terms mean, why they matter, and how getting a solid handle on them can benefit your company.
What are working capital needs?
Working capital refers to the funds necessary for day-to-day operations of a business. Working capital needs are the short-term financial requirements to keep the business running smoothly. This includes money for regular expenses like raw materials, inventory, overhead, payroll, rent, supplies, and immediate debts. It also covers cash flow during slower periods or seasonal dips in revenue.
So, working capital requirements refers to the minimum amount of working capital a company needs to fund its operations. This is typically calculated as a percentage of projected annual sales. In India, working capital requirements are often benchmarked at 25% of estimated turnover for the coming year.
Working capital is like the fuel or oxygen that keeps a company alive on a daily basis. Without enough working capital, operations can sputter and stall. Knowing your working capital requirement gives a target number to shoot for when accessing financing options like business loans, lines of credit, or overdraft facilities. This helps ensure adequate capital to bridge the gap between outgoing operational expenses and incoming cash from sales and receivables.
Benefits of tracking working capital needs
Staying on top of working capital needs offers many advantages:
- Improved efficiency: Keeping receivables, payables and inventory optimised means smoother operations.
- Enhanced liquidity: Good working capital planning ensures sufficient cash flow to cover short-term obligations.
- Increased profits: Efficient working capital management boosts profitability and financial strength.
- Financial stability: Understanding working capital needs leads to stability even in tough times.
Getting financing to cover working capital needs
For many companies, especially smaller businesses, working capital needs exceed their on-hand funds. This capital gap must be filled by accessing outside financing.
Business loans from NBFCs ranging from Rs. 2 lakh to Rs. 55 lakh can provide working capital financing tailored to your requirement. Lines of credit and overdraft facilities also offer flexible financing that can be drawn as needed to cover short-term needs.
The ideal financing mixes predictability of term loans with flexibility of lines of credit. This balanced approach cost-effectively keeps working capital needs covered.
Conservative approach to working capital
When estimating working capital needs, experts recommend taking a conservative approach. Better to overestimate needs than underestimate and come up short. The goal is determining the maximum working capital required during peak business cycles and seasonal highs. This becomes your working capital requirement benchmark.
Like your personal finances, conservatism and prudence in managing working capital leads to stability and success. Understanding these needs fully lets you access the right financing to keep your company humming.
Working capital is the lifeblood of any business. Carefully tracking ongoing working capital needs and determining your working capital requirement are key steps to maintaining operational and financial health. With adequate financing in place to cover short-term needs, companies can confidently sustain growth and profitability over the long-term.
