Working Capital Definition & Importance of Working Capital in Business Plan

1. Whatis WorkingCapitalinBusinessPlan? Every business requires money to function. That is why it is said that it is sometimes referred to as the lifeblood of any business. The lifeblood of any business, working capital refers to the money available at your disposal to meet present and short-term needs. It refers to liquid funds in the form of cash or depositsthatyoukeepforaddressingdailyoperations.Acriticalbusinessmetric,workingcapitalisalso a measureofthe abilityofyour businesstopayshort-termdebts. Whatis net workingcapital? Net working capital is the difference between current assets of the business and its short-term debts & current liabilities. You must have a positive net working capital as it demonstrates that the business’s financial goalsareachieved, andyourbusinessis financiallystabletoinvestinotherbusiness operational requirements. What isworking capital management? Working capital management is a business tool that ensures the best usage of a business’s current liabilities andassetsforitseffective operation.Thesoleaim ofworkingcapital managementisto examine abusiness’s currentassets andliabilities tomaintaincashflow andmeetthebusiness’s financial obligations. It assists in addressing planned as well as unplanned expenditures and determining the business’sefficiencyby maintaining liquidity. ImportanceofWorkingCapitalFinanceManagement Now that you know what is working capitalall about and which capital is known as working capital, let’s understand the importance of working capital finance management. No one can deny the importance of workingcapital inabusiness.Therefore, wemustdo theworking capitalfinance managementto understand and manage the working capital in a business. So that the business can flourish without any problem.Itsimportanceisnot restrictedtojustoneaspect.Doing sohelps you to: PlanforFunds Theveryfirstimportanceofworkingcapitalfinanceisplanningforfunds.Withaholisticviewofyour workingcapital,youcanplanforfundsaccordingly.Whenyouknowthelikelyexpensestobeincurred

2. atpresentorinthefuture,youcanchalkouttheneedforfundsaccordingly.Ifyouarelikelytoincura shortfall, thenyoucanapplyfor anunsecuredbusinessworking capitalloanto overcome acashcrunch. AidsinDecisionMaking Thesecondimportanceofworkingcapitalfinance isthat itaids indecision-making.Anaccurate estimate of your working capital and its management helps you and your finance team to appropriately manage the available funds and decide how much to spend in the near term. The right estimate allows youto saveand payoffyour obligationswiththeutmostease. ImprovesCreditworthiness Another importance of working capital finance is that it improves creditworthiness. When you have adequatelyplannedfor yourworking capital, the sameaids in timelypayment toyourvendorand lenders if any. This does not only strengthen relationships but also enhance your creditworthiness in the market. Ithelps youobtain acustomizablebusiness workingcapitalloan tomeetyourfund requirementsinthe future. BuildsCredibility Building credibility is another importance of working capital finance management. It’s through working capital that you pay your employees and vendors. Effective management of working capital helps you maketimelypaymentstothem,thusbuildingyourcredibility.Italsomotivatesyouremployeestogo the extramilefortheorganization andgobeyond their callofduty. Working CapitalinBusinessPlan The importance of working capital finance in business planning is known to everyone and how working capital financeplays a crucial role in the business plan. While formulating a businessplan, you must make adequate provisions to lay your working capital needs and identify its sources. While the sources could be cash credit, bill discounting, trade deposits, and notes payable, among others, the plan must also includethe differenttypes ofworking capitalthatareasfollows: PermanentWorkingCapital:Alsoknownasfixedworkingcapital,itincludestheminimumcurrentassets thatarerequired to keepoperationsrunning. VariableWorkingCapital:Thisreferstotheextraworkingcapitalthat’susedforvariousoperational expenses.

3. Reserve Margin Working Capital: As the name suggests, this capital is kept as a reserve for unforeseen expensescomingyourway.Thisworkingcapitalhelps youto meet liquidityneeds inan emergency. Special Variable Working Capital: It refers to the extra working capital that your business needs for fulfillingobjectivessuch aslaunching newproducts,effectively managingrisk,andundertaking marketingcampaigns,among others. Need forAdditionalWorkingCapital Sometimes, your business may require additional working capital. For example, you may need additional working capital to pay vendors and suppliers during peak business season. In such a scenario, you can availa businessloan forworking capital. Such loans are also known as unsecured business Capital Working Loans as you don’t need to pledge any security to your lender. All you need to do is to fill up an application form and upload the relevant documents. Upon successful validation, the loan amount is disbursed and credited directly into your account. FrequentlyAskedQuestions Whatiscapitalinbusiness? Capitalinbusinessreferstothesumofallfinancialassetsthatareneededtoproducebusiness-related servicesandgoods.Thesefundscanbeutilizedtostartbusinessoperationsandmeetdailyexpenses. Hence,theanswertoyourquestion-whatiscapitalinbusinessissimple.Workingcapitalhelps businesses togrowandexpand. Whatis networking capital? Networkingcapitalisthedifferencebetweenabusiness’sshort-termassetsanditsliabilities.Net workingcapitalisassessedutilizinglineitemsfromabalancesheetofyourbusiness.Usually,thelarger yournetworking capital balance is,thehigherthe chances that yourbusiness canmeet its current financialobligations. Whatis workingcapitalmanagement? Workingcapitalmanagementisabusinesstoolthathelpsbusinessestomakeuseoftheircurrentassets & liabilities and maintain an adequate cash flow to meet various business’s financial obligations. By managing working capital effectively, businesses can free up cash that would otherwise be lost on the balancesheet. To put it intosimple words whatis working capital management all about? Working capitalmanagement helpstoimprovethebusiness’sprofitability and earnings.

4. Theloanalsocomes inhandywhen you areundergoing acash crunchdueto non-paymentfrom customers or experiencing a dip in business due to black swan events like the Covid-19 pandemic. The fundsreceived help you tosail through tough times and meet your obligations.PoonawallaFincorp offers a Working Capital Loanfor business growth in a jiffy at a competitive rate of interest. Callus on our toll-free number 1800 266 3201 or write to us at customercare@poonawallafincorp.com to know more.