An innovative idea and a well-laid-out expansion plan are crucial elements to the success of any business. However, without adequate working capital, it can be nearly impossible for business owners to achieve the goals they set for themselves.
Working capital is crucial to ensure the smooth functioning of everyday business activities. It consists of the liquid funds that the company possesses in the form of cash or bank deposits necessary to manage daily expenses. In mathematical terms, working capital = current assets – current liabilities. But what if you calculate the working capital of your business and end up with a negative figure?
In this article, we will be explaining what negative and positive working capital are and how a working capital loan can help your small business seamlessly manage its short-term obligations.
Negative and Positive Working Capital: Explained
Negative working capital is closely associated with the current ratio. The current ratio is defined as the liquidity ratio that ascertains your company’s ability to meet its short-term obligations. It is calculated by dividing the current assets by the current liabilities.
If the value of the current ratio comes out to be less than 1, it means that the value of the current assets is lower than that of the current liabilities, and therefore, the business has negative working capital.
If the working capital is temporarily reflected as negative, it usually means that your company is seeing an increase in its accounts payable. This could be a result of factors like a bulk purchase of goods or services from vendors. However, if the working capital remains negative for a long time, it might be time for you to think about a working capital loan.
If a company’s current assets exceed its current liabilities, there is positive working capital. While it is good for companies to maintain positive working capital, the presence of excessive working capital usually means that a major amount of the funds are tied up in operations.
Taking a Working Capital Loan
Opting for a working capital loan for your small business can be an effective strategy to bring your working capital figures back to positive. A loan can allow you to maintain a healthy cash flow, ensuring that your business is financially stable and ready to meet unexpected expenses.
Working capital loans help your business meet all short-term obligations on time. Expenses like employee salaries and rent are non-negotiable and have to be met on time. Having the right amount of working capital will help you cover these expenses as they arise, which in turn will build a solid foundation for your business.
Moreover, a working capital loan can help you cover sudden expenses that can show up during inconvenient times. For instance, a tax payment that you did not account for can take a huge hit on the working capital and can also disrupt routine operations if not managed properly. A loan can keep you clear of all unexpected expenses and keep your business stable even during the most challenging times.
Working Capital Loan: Ensuing Efficient Fund Management for MSMEs
Working capital management is crucial to handling all the assets efficiently and ensuring routine stability. The right utilization of the amount acquired from a working capital loan is essential to strike the perfect balance between business growth, liquidity, and profitability.
As a daily necessity, working capital is vital to ensure the smooth running of operations. Working capital management entails the effective management of inventory, account payables, and account receivables. The primary objective of working capital management is to maintain the operating cycle, reduce the cost of capital, and accelerate returns on current asset investments.
Small business owners need to evaluate and optimize their working capital on a regular basis to diagnose and eliminate any form of inefficiency. This would ensure high returns on capital, business value appreciation, and better profitability.
Acquiring a Working Capital Loan from a Reputed FinTech
As FinTech companies gain currency in the country, it is recommended to connect with a reputed one for all your working capital needs. Leading FinTech companies like Kinara Capital help MSMEs acquire collateral-free working capital loans through their 100% digital process. You can simply visit their website or download the app on Google Playstore to c0mplete the entire application procedure.
So, turn your negative working capital into positive with a working capital loan and seize all opportunities for business growth.
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