In simple language working capital can be described as the funds required by an enterprise to finance its day-to-day operations. The working capital of a business is calculated by deducting current liabilities from current assets. Hence, an enterprise has a working capital surplus if its current assets are more than current liabilities. On the other hand, if the current assets are less than current liabilities, the business has a working capital deficiency.

1. Importance of Working Capital in Business

2.  In simple language working capital can be described as the funds required
by an enterprise to finance its day-to-day operations. The working capital
of a business is calculated by deducting current liabilities from current
assets.
 Hence, an enterprise has a working capital surplus if its current assets are
more than current liabilities. On the other hand, if the current assets are
less than current liabilities, the business has a working capital deficiency.
 It is always important for small businesses to understand the importance
of working capital in business, maintain working capital surplus to carry
on business operations efficiently and meet short-term financial
obligations timely.
 There are also a number of reasons why small businesses must explore
ways to prevent working capital deficit.

3. Importance of Working Capital in Business: 7 Important
Benefits
1) Depicts Financial Health of the Enterprise
 While providing credit to small enterprises, lending institutions assess
their financial health based on working capital ratio.
 The calculate working capital ratio by dividing the current assets by
current liabilities.
 When the working capital ratio is less than one, the business has more
current liabilities than current assets.
 The lack of additional current assets may even make it difficult for the
enterprise to repay the debt on time.

4. 2) Impacts Cash Flow Situation Directly
In addition to depicting its financial health, working capital also indicates
the enterprise’s liquidity position. When the business has more current asset
than current liabilities, it can meet its short-term financial needs and
obligations by converting the current assets into cash. Hence, working
capital deficit directly impacts a business’s cash flow situation, and makes it
difficult for the enterprise to meet immediate financial needs. Here are a few
tips to improve business cash flow.
3) Helps to Maintain a Good Credit History
Often small business owners find it difficult to avail credit on favourable
terms. When the business has a good credit history, it becomes easier for
entrepreneurs to meet strict credit requirements and negotiate for favourable
interest rates.

5. 4) Avail Cash Discount
Often sellers or suppliers of goods motivate business owners to make
payment within a specific timeframe by allowing cash discounts. The small
business owners must avail cash discount to reduce overall cost of
inventory. But negative working capital often compels entrepreneurs to buy
inventory on credit. Hence, the business owners cannot avail cash discount
regularly without maintaining positive working capital.
5) Keep Employees Motivated and Productive
Many employees feel demotivated if the employer does not pay salaries and
wages on time. The employees even start questioning the business’s
financial stability and security when the entrepreneur does not make
payroll on time. No entrepreneur can pay salaries and wages fully and
timely without maintaining positive working capital.

6. 6) Use Fixed Assets More Efficiently
Working capital is calculated by deducting current liabilities from current
assets. But no enterprise can use its fixed assets like land and machinery due
to working capital deficiency. Also, working capital deficiency will erode
profits through depreciation in the value of fixed assets and interest on long-
term debts. Hence, enterprises need to maintain a positive working capital
to use their fixed assets efficiently and extensively.
7) Stay Prepared for Unforeseen Contingencies
The revenue and profits of an enterprise is impacted by both internal and
external factors. There are always chances that the enterprise has to invest
more funds to complete an operating cycle quickly and efficiently. Likewise,
the small businesses also need additional working capital to carry on
businesses during depression and compensate huge losses.

7. On the whole, no enterprise can remain profitable and sustain growth
without maintaining working capital surplus. However, there are
always chances that the enterprises have to avail credit to meet working
capital needs. The enterprises can meet working capital finance needs
through a variety of business loan products. But they can always
consider availing credit from non-banking financial companies to avoid
strict credit requirements and lengthy loan appraisal process.

8. Content Designed By: Pincap.in