Working capital is regarded to be the measurement towards the presence of liquid assets that an organization has for developing its business. Usually, organizations which has plenty of working capital is likely to have much more success, as they can improve on their operations and be able to expand quickly and in all directions. However, organizations not having adequate working capital could lack the necessary funds that is required for growth and hence would have stunted operations.
For Small Business
Small organizations often tend to use this kind of capital for paying off short term obligations like advertising or inventory. At the same time, it also can be used for meeting long term projects like expansion or renovations. These are termed to be elements present in business cycle which can absorb quickly cash. In case, this type of capital is seen to dip very low, then the business could possibly risk being out of cash, a situation no entrepreneur would like to be in. Also, profitable businesses could run into trouble, in case, they lose capability to meet short term obligations. Small business loans or business financing could be utilized as fast cash options for cushioning the periods if flow is not termed to be readily available or ideal.
Understanding why Cash Flow is Required for Any Business
It is termed to be the life blood of every business, irrespective of the domain and size. It is the primary task of very entrepreneur to keep cash flowing, while using it to generate profits. In case, a business operates profitably, then in theory, it should generate cash surplus. But, if surplus is not generated, then the business could lose cash eventually and expire. With quick expansion of the business, the more cash would it require for meeting this type of capital. Its appropriate management is likely to help in generating cash and to assist in reducing risk and enhance profits.
Importance
- Strengthening solvency: This capital tends to help the business to operate smoothly and to overcome all financial issues, by paying off short term liabilities. Also, salary and wage payment, overheads, raw material purchase, etc., can be made without much delay. Proper capital of this type does help it to maintain solvency of business, thereby offering uninterrupted production flow.
- Enhancing Goodwill: It is important to have sufficient working funds to enable the business establishment to make timely payments. This will help to create and to maintain Goodwill, which is enhanced since all operating expenses and current liabilities get paid on time.
- Easy to obtain loans: The organization having adequate working funds, excellent credit rating and high solvency can easily arrange loans from different financial institutions and banks in favorable and easier terms.
- Regular raw material supply: With quick and timely payment being made on raw material credit purchase, its regular purchase is ensured by the suppliers and therefore, there is no hamper in production.
Being in a position to face crisis: Proper working funds help the organization to face any kind of business crisis like depression.