Working capital solutions helps your business to pay day-to-day operations costs and also to meet its short-term financial goals.
In this article, we discuss in detail "Working capital solutions" and clear all of your doubts related to it.
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What is working capital
Working capital is the difference between the business's Current assets and Current liabilities. Current assets include: cash, inventory, accounts receivable (cash owed to the business by customers), etc, and current liabilities include: short-term loans, accounts payable (money owed by the business to suppliers), etc.
The formula for working capital is:
Working Capital = Current Assets - Current Liabilities
working capital is used to determine the amount of funds available to run the business's day-to-day operations.
working capital solutions
The strategy, tools, or financial products that the company uses to manage its working capital and improve its liquidity is known as working capital solutions.
Here are 6 common working capital solutions:
1. Factoring:
The process of selling your unpaid invoices to a third party is known as factoring. By factoring you get instant cash by selling your account receivable which you can use to meet your short-term financial goals.
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2. Inventory management:
You can use inventory management software to manage your inventory level, reducing excess or obsolete inventory, and improving supply chain efficiency. By doing this, you effectively maintain your working capital.
3. Negotiation:
You can negotiate payment terms with suppliers to maximize the availability of working capital. This may include providing a discount on early payment, extending payment terms, etc.
4. Cash flow forecasting
The process of predicting future cash inflows and outflows is known as Cash flow forecasting. Through Cash flow forecasting you can make the best use of working capital and prevent your business from financial pitfalls.
5. Funding:
There are various ways through which you can raise funds for your business and improve your working capital. Some common ways to raise funding include Friends and family members, Venture Capital, advertisements on a social platform, etc.
6. Working Capital Software
There are various Working Capital Software available on the market. Through them, you can manage accounts receivable, accounts payable, and inventory, and overall increase your working capital.
What are the benefits of working capital solutions?
There are several benefits of working capital solutions. Some of them are:
1. Liquidity:
Working capital provides you with instant cash which you can use to fulfill day-to-day business operations or to meet short-term financial goals. Such as: paying employees or suppliers, ordering new products, etc.
2. Market opportunities:
Through working capital, you can invest in multiple market opportunities. Such as: creating a new product or service, entering into a different industry, etc.
3. loans:
Good Working capital prevents your business from short-term loans and allows you to invest in business growth.
4. Financial flexibility:
Through Working capital, businesses become Financial flexibility. For instance, if a business has good Working capital it can respond to unexpected expenses, seize growth opportunities, invest in new projects, and also adapt to the changes in the market more readily.
Which factors affect working capital?
Multiple factors affect working capital. Some of them are:
1. Industry
Each industry has different requirements for working capital. For instance: In a comparison of the manufacturing business to the service business. The manufacturing business requires more working capital.
2. Rapid sales
Rapid growth in sales of products or service put an impact on your working capital. Because after this, you need to invest working capital in the creation of more products or services.
3. Seasonal demands
There are some products whose demands vary from season to season. In the season of high demand for a product, business needs to prepare working capital to fulfill increased inventory and operational needs.
4. Unnecessary spending
When the company has an excess amount of working capital. Then there are chances that the company may spend it on unnecessary things. Overall the company wastes its money.
5. External factor
External factors such as currency exchange rates, interest rates, inflation, and market conditions also impact the working capital.
What are the limitations of working capital?
Working capital provides several benefits to the business. But it consists of limitations also. Some of the limitations of working capital are:
1. Change in Working capital
The value of working capital does not remain the same at all times. Its value changes from a change in current assets and current liabilities.
2. Flexibility
Working capital is used to meet a business's day-to-day operations and short-term financial goals. It can not be considered to meet long-term financial goals.
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What is the working capital cycle?
The cycle which considered the length of time it takes to convert the company's current assets and current liabilities into cash is known as the working capital cycle. It is essential for companies that sell products.
Eg: if the working capital cycle is long it means that the capital is taking more time to give a return and if the cycle is short it means that the capital is taking less time to give a return.
The working capital cycle formula is Inventory Days + Receivable Days – Payable Days
How is working capital different from cash flow
Working capital and cash flow both are important financial metrics of a company. But they are not the same. The working capital shows the current asset and current liabilities of a company and it helps companies to meet their day-to-day and short-term goals. Where's the cash flow is the total amount of cash in and out of a business and it displays the amount of cash the company generates over a specific period.
what are the benefits of using working capital solutions for small businesses
There are several benefits of using working capital solutions for small businesses such as it helps to improve liquidity, increase cash flow, and Shorter cash-conversion cycles. Overall it improves the financial performance of a small business.
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