Working Capital Management and its significance

Working capital is the capital that your business needs for meeting its daily operational needs. If you do not do working capital management properly, your business will find it difficult to pay its short term liabilities. Short term liabilities are those liabilities that your business will have to pay within a year or less. If your business fails in paying its short term liabilities, it will become bankrupt or insolvent.

The Need Behind Working Capital Management

Working capital helps businesses to fund their operations and meet short-term requirements. It also helps businesses to achieve operational expansion. Therefore, working capital management is crucial for smooth , uninterrupted operations of any business.

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Types of Working Capital

The different types of working capital are as follows:

• Gross Working Capital

  It denotes the total value of a company’s current assets, including cash, short-term investments, and market securities. The gross working capital won’t reveal anything about the current liabilities.

• Net Working Capital

  It refers to the difference between the current assets and liabilities of a company. Unlike gross working capital, which is always positive, net working capital can either be positive or negative.

• Regular Working Capital

  It connotes the amount of funds required by a business to fulfil its day-to-day operations. The regular working capital can be the cash required for purchasing raw materials or paying employees and suppliers.

• Permanent Working Capital

  The permanent working capital determines the amount of cash required by a company to fulfil all operational needs without any interruptions. For instance, it can refer to the minimum amount a company needs to smoothly run its operations.

• Variable Working Capital

  It refers to the temporary capital that is invested in the business.

• Reserve Margin Working Capital

  It refers to the amount required to fulfil the sudden requirement of a business. These funds are reserved for unexpected contingencies.

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Parting Words

Businesses with erratic cash flows can opt for working capital loans to bridge the gap between receivables and payables. But look for a reliable lender and assess your requirements to apply for the best working capital loan.

Frequently Asked Questions

What is the primary purpose of getting a working capital loan?

The purpose of working capital loans is to help businesses meet their short-term fund requirements.

How is net working capital different from gross working capital?

Gross working capital is current assets. Net working capital is the difference between current assets and current liabilities.

What are the key components of working capital?

The key components of working capital include accounts receivable, accounts payable, inventories, and cash.