Importance of Working Capital for the Growth of a Business
Working capital is considered to be the lifeblood of any business. Businesses require funds at their disposal to take care of any present and short-term needs. This capital refers to the liquid funds for tackling expenses of daily operations. One of the most crucial business metrics is the working capital, which indicates an organization’s financial health. It is also imperative to understand the performance of a business.
For those who are wondering how working capital is essential for business growth, go through the following points to learn more:
1. Working capital helps in the decision-making process
A business needs to ensure that it is spending the right amount for the short term to avoid waste of funds. This is only possible when the company has an accurate estimate of the working capital. By effectively managing a business’s working capital, it is possible to take care of all the short-term debt obligations without any complications.
2. It helps in building credibility
An employee needs to believe in the organization they are working for to walk that extra mile. For this, a business needs to take good care of its staff, especially when it cng timely payments. Now, employees’ salaries are paid through working capital. This is why it is essential to make sure that there is a good flow of working capital, as this would help in building the business’s credibility.
3. It improves the business’s creditworthiness
Working capital is not just used to pay a business’s staff. It is also used to clear payments pending for vendors or debt with lenders. Not removing these payments on a timely basis can negatively affect the business’s creditworthiness. Maintaining steady working capital can help keep the business in a good financial stance. This will also make it easier to get loans like working capital loans for new business opportunities in the future if required.
4. It ensures sufficient cover for revenue fluctuations and unexpected expenses
It is natural for a business to face ups and downs. Some businesses are in seasonal industries, which means that there are periods when they might generate less revenue. Having adequate cover in terms of working capital can ensure that the business is financially stable to manage these revenue fluctuations. There are also instances where a business can face unexpected expenses. Having enough working capital can ensure no shortage of funds to take care of these expenses.
Any business needs to effectively manage its working capital to ensure the availability of liquidity. This is required to take care of all short-term expenses. Managing working capital involves cash, inventory, accounts receivables, and payables. Efficient functional capital management is quite essential to ensure a smooth operating cycle. This would help in maximizing returns on current investments and minimizing the cost of capital.