Every company needs a steady cash flow stream to keep the wheels turning and pay the bills. Staff salaries, regular payments to suppliers, monthly rent, monthly utility payments, etc., are all examples of this category. Working capital management is the process through which a company ensures it has sufficient funds to cover its operating costs.
Every company faces the challenge of managing its working capital via its cash flows. This is particularly true for MSMEs (MSMEs). What should business owners do in such a predicament? Getting a working capital loan from a bank or a non-banking financing firm is a viable choice. For instance, there are many overdraft loan facility in Jamnagar which can help you manage it.
A company may function for the short term with the help of a working capital loan. Such loans often range from relatively modest sums to longer durations (from a few months to a few years), while the lending institution determines the exact size and length of the loan and its accompanying conditions.
Companies with inconsistent revenue or cash flow, those with seasonal business cycles, and those needing a modest capital infusion to plug the gap between receivables and payables are the ideal candidates for these types of loans.
When there is an unexpected spike in demand for a company’s goods or services, such as during the holiday season, the company may need additional funding in the form of a working capital loan to satisfy that demand. You can take help from an overdraft facility in Jamnagar.
Types Of Working Capital
Let us get on to discuss the types of working capital.
1. Net Working Capital: –
It’s the total of a company’s short-term liquid assets minus its short-term liquid debts. It reveals the company’s operational health and whether or not it can sustain itself financially.
2. Regular Working Capital: –
Regular working capital refers to the permanent working capital needed for day-to-day operations. Costs like frequent purchases of raw materials and employee wages are included here.
3. Variable Working Capital: –
Such operating cash is only needed for a limited period. The whole may be broken down into two halves.
4. Special Variable Working Capital: –
It is part of the company’s operating capital and used for contingencies.
5. Gross Working Capital: –
The entire company’s current assets are shown here. The term “current assets” refers to holdings that can be quickly and easily turned into cash. A company’s current obligations aren’t included in its gross working capital.
6. Permanent Working Capital: –
It’s the minimum needed to keep regular business activities going at a given company. For example, payroll, supplies, utilities, etc., all need a certain amount.
7. Reserve Margin Working Capital: –
In addition, businesses should set aside funds in case of natural disasters or worker strikes. Such funds are considered part of permanent working capital and are set aside expressly for this use.
8. Seasonal Variable Working Capital: –
There are times of the year when a company’s costs are likely to skyrocket, such as during peak tourist seasons or when the number of people using air conditioning systems increases. Financial flexibility is maintained via this source of operating cash.
9. Negative Working Capital: –
A negative working capital or working capital deficit is a deficiency in working capital. This indicates that a company’s current liabilities exceed its current assets.
Importance Of Working Capital
The success of every firm hinge on its ability to manage its working capital or the cash on hand that can be used to cover its immediate and relatively short-term debts. Working capital management ensures the firm’s continued viability and efficient operations because of the company’s legal need to pay for such costs.
Sufficient funds are essential for every firm to pay for operational expenses. Whether saving or taking out a loan, businesses should always be ready to meet their working capital needs.
Companies with seasonal sales or fluctuating cash flow might greatly benefit from obtaining a working capital loan in the form of short-term financing to help bridge the gap between their receivables and payables. Banks and alternative lenders often issue working capital loans to companies experiencing financial difficulties.