Business

Working Capital – Definition, Components, and Calculations

Business Loan

India has around 42.5 million registered SMEs, employing over 106 million people or almost 40% of the nation’s work-force. Such tremendous growth in this sector also requires a significant amount of working capital (WC) to streamline business operations. It is necessary to maintain the day-to-day expenses and balance the liquidity level of your enterprise.

WC is required for every business sector for the following reasons:

  • For business expansion
  • To manage down-time
  • To meet short-term financial obligations
  • Works as a cash buffer

Components of working capital

Its key components are: 

  1. Current assets

Working Capital is defined by the type of assets that can be easily converted to cash during unforeseen business requirements. These types of assets are mostly utilised to meet the financial requirements of day-to-day operations of your business. Current assets mainly involve short-term investments, trade receivables, bank savings, inventory, etc.

  1. Account receivables

It is the capital received from clients that have been accumulated throughout the business. The number of receivables is accounted for in the company’s balance sheet. Although they fall under current assets, they cannot be utilised unless liquidated.

An essential component of working capital management must be effectively managed to improve a company’s financial health.

  1. Account payable

An essential part of working capital management, it is the obligation an enterprise is required to pay-off to suppliers and creditors. It comes under the current liabilities and can be managed by negotiating with creditors into extending the reimbursement period.

Companies must manage account payable in such a way that the payable outstanding is less than annual collection. This ensures that an enterprise continues with its operations smoothly.

  1. Inventory

It includes the raw materials, equipment, etc. purchased by an enterprise for its production of goods and services. The turnover of your company’s inventories determines how successful your business is.

  1. Cash equivalents

Tabbed under the current assets, it includes the most liquefiable funds. It is crucial for every business to maintain a smooth integration of cash equivalents into WC management.

A substantial amount of cash must be present within a company to act as a cash buffer. A working capital loan is a suitable financing option in this situation to cover any unexpected shortfalls in production or sales cycle.

Alternatively, you can also opt for a Business Loan from lenders like Bajaj Finserv at competitive rates. It can fetch you a hefty sum of up to Rs. 30 Lakh to meet your WC requirements. Further, if you are an existing customer of this lender, you can also enjoy pre-approved offers.      

How is the working capital calculated?

The formula of WC is: Current Assets – Current Liabilities

For instance, the current assets of your business include:

  • Raw materials: Rs. 2,00,000
  • Cash: Rs. 1,00,000
  • Inventory: Rs. 35,000
  • Finances provided to employees: Rs. 45,000

The following are your current liabilities:

  • Outstanding funds: Rs. 2,50,000
  • Unpaid expense: Rs. 70,000

Therefore, your business’s total current assets = Rs. 2,00,000 + Rs. 1,00,000 + Rs. 35,000 – Rs. 45,000 = Rs. 2,90,000.

Total value of current liabilities: Rs. 2,50,000 + Rs. 70,000 = Rs. 2,57,000. Therefore, the total working capital stands at Rs. (2,90,000 – 2,57,000) = Rs. 33,000.

With this definitive guide on working capital needs and how to calculate it, you will be able to estimate the loan amount that must be availed. Now, it is up to you to approach a lender of your preference and avail a working capital loan on the best terms.

 

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