How to Optimally Meet Your Business’ Working Capital Needs

Working capital is essentially the amount by which your current assets exceed your current liabilities. It is the amount that you, as a business owner, utilise for the everyday functioning of your business. Assuming that you have a dry fruit sorting and packing unit, your working capital will help you pay salaries for your employees, pay for utilities and the rental cost of equipment such as a conveyor belt, air cleaner and grading and sizing machinery. This is the amount that you also use for business expansion, paying your suppliers and creditors, training your employees or for unexpected expenses. Needless to say, smooth operations are virtually impossible when you have insufficient working capital.

So, take a look at how to calculate your working capital needs and then optimally provide for it.

Calculating working capital needs

The simplest way to calculate how much working capital you require is expressing it as a part of your revenue. To arrive at the amount, you can use this formula:

Working capital required = inventory + accounts receivable – accounts payable

Assume that when expressed as a percentage of your annual revenue, your inventory is 0.8%, your accounts receivable is 1.5% and your accounts payable is 0.3%. Then your working capital requirement is as follows:

Working capital required = inventory + accounts receivable – accounts payable
                                          = 0.8% + 1.5% – 0.3% = 2%

This means 2% of your annual revenue is your total working capital needs. So, if your annual revenue is Rs.80 lakh, your working capital needs come to Rs.1.6 lakh.

Once you determine your working capital needs, it’s also easy to identify a shortfall in your working capital. Signs such as not being able to collect payments on time, or taking extremely long to clear inventory result in insufficient and blocked working capital. In such a scenario, you must take measures to boost your working capital.

Here’s how you can do this.

Improve payment collections

One way of ensuring an influx of working capital is by improving payment collection to the best of your abilities. Late payments can throw your finances off track, so look into the measures you can take to prevent this. Offer a discount for those willing to pay in advance or on delivery, and negotiate shorter payment windows wherever possible. Also, accept options such as online payment and via cards to encourage more people to pay as soon as possible.

Negotiate payment terms with suppliers
Conversely, the more time you have to pay your suppliers and vendors, the more money you’ll have on hand to tackle the myriad costs associated with running your business. So, negotiate payment windows with lenders and suppliers and get as long a timeframe as possible.

Manage your inventory smartly

Inventory that lines your warehouse’s shelves is blocking working capital too. This is especially true for perishables that have a limited shelf life, and apart from security you will have to look into temperature control for such inventory as well. So, determine how much inventory you need at a particular time and streamline your process. This way you’ll be able to avoid slow-moving or stagnant inventory and so keep inventory management costs to a minimum.

Take a working capital loan

In situations where you need to supplement your working capital urgently and can’t wait to implement other changes, consider a working capital loan. Lenders such as Bajaj Finserv issue Working Capital Loans that offer up to Rs.30 lakh without any collateral. With approval in 24 hours and just a handful of documents required to apply, this loan is ideal even when you’re pressed for time. Additionally, you can repay the amount over a long, flexible tenor of your choice, and apply for and manage your loan online.

Keep these tips in mind to manage your working capital needs smartly. If you anticipate needing external assistance by way of a working capital loan, remember that you can expedite the process with help from Bajaj Finserv. Check your pre-approved offer in under a minute and use customised deals to apply swiftly.

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