Working Capital Cycle and How Does it Help Businesses

Every company, small or big, into whatever business possesses a working capital base. Working capital is at the centre of this financial system- the cash on hand to pay daily expenses. Working capital management is a vital indicator of a company’s financial health. Part of this is knowing about the working capital cycle and how it plays out within business functions.

In this blog, we will look at a working capital cycle concept, discuss how it assists businesses, and then explore how working capital loans-TReDS can provide support.

What is a Working Capital Cycle?

The working capital cycle, the WCC, measures the time required for a business to convert its net current assets or working capital into cash. In other words, it shows the cash inflow and cash outflow for a given period, which usually covers the time from the acquisition of inventory up to when sales revenues can be collected. The shorter the cycle, the better the business liberates money for reinvestment.

Typical stages of the working capital cycle are:

Purchasing of raw materials or inventory

Production and manufacturing

Sales and collection of revenue

Payment to suppliers or creditors

Components of the Working Capital Cycle

Several elements characterise both the duration and the productivity of the working capital cycle:

Stock Period: The duration that it takes to sell the stock. The shorter the stock period, the more efficient it is in managing the inventory. However, there may be a risk of stock out.

Receivables Period: Time taken to collect receivables from customers. The more extended receivables periods are for a business, the more challenging it gets to have positive cash flow in that business.

Payables Period: Time taken by a business to pay its suppliers. This will help in accelerating payments to improve the cash flow in the short term. However, if payments happen too late, supplier relations may be strained.

Operating Cycle: Operations form an integral part of the working capital cycle, and efficient management of this cycle is one of the best ways to avoid cash flow problems. This involves all the processes from acquiring inventory to collecting customer payments.

Why the Working Capital Cycle Benefits Businesses:

1. Facilitates Smooth Operations:

A healthy working capital cycle ensures cash is available in the bank to meet your current expenses from day-to-day operations such as wages, rent, and utility bills. Operations are never interrupted because cash flow is constant, and there is no need for a heavy reliance on additional funding sources.

2. Increased Liquidity:

Working capital management improves liquidity; that is, cash can be turned into cash quicker. The better the liquidity of a firm, the shorter its working capital cycle and the more timely the reaction to unanticipated sources of finance or new opportunities.

3. It reduces reliance on external financing:

Successful businesses would have minimal reliance on lending products to run their working capital cycles. For a business in a cash flow compression cycle, however, one source of short-term tools-working capital loans, for example-could be just what helps keep it in business and servicing its operations.

4. Improves Credit Score:

Effective working capital management places the firm in good books. Ensuring the settlement of suppliers and creditors, dues on time and in adequate amounts, coupled with good cash flow, has seen many busineses, appear financially stable. Such stability, therefore, leads to better terms in successive loans or credit.

5. It Favours Growth and Expansion:

This provides organizations with cash they can use to acquire machinery, hire additional staff, or even launch advertising campaigns, for example. Organisations whose operations can generate more cash are well-placed to expand without taking much debt. TReDS and the work capital loans will facilitate this process by being readily available whenever it is required.

That means an efficient working capital cycle is only an ideal case, especially in an industry with a long production process or delayed receivables. Working capital loans are here to help.

What are working capital loans?

Working capital loans are short-term and intended for financing a business’s regular operations. Unlike long-term loans that invest in a business for example equipment or real estate, working capital loans are actually used for paying the operational costs currently due and payable, such as payroll, rent, and utility bills.

Such loans are especially helpful to firms with seasonal revenues or long receivable cycles. They act as a buffer in low cash flows and sustain operations.

Working Capital Loans: How Do They Help Businesses:

Bridging Cash Flows gaps: With a difference in cash inflow from customers and payment to the suppliers of such firms, working capital loans act as a gap-bridger and help to run it smoothly.

This working capital loan supports seasonal businesses. Certain businesses, such as retail businesses or tourism-oriented businesses, trend seasonally. Revenue may be low during off-peak times, and a working capital loan may support costs during the low seasons.

Emergency funding: When unforeseen expenses occur, such as equipment breaking down or needing an emergency fix, the working capital loan breathes life into a business and enables it to face those challenges without putting operations at risk.

Capitalising on Opportunities: When production needs to be scaled up or more inventory purchased fast to increase deliveries because demand has risen, this short-term loan for working capital helps the firm capitalise on such growth opportunities.

TReDS: A New Age Platform for Managing Working Capital

Besides raising funds by working capital loans, TReDS helps businesses to raise funds quickly. TReDS is an online platform wherein MSMEs realise their trade receivables or open invoices for immediate cash.

How Does TReDS Work?

MSMEs upload their invoices on the platform.

Banks or financial institutions bid on such invoices.

The MSMEs are paid cash on the highest bid, making them capable of maintaining a cash flow without delay for further payments.

This process provides the option for loans on working capital, but it is quicker.

Uploading Invoices: MSMEs upload their invoices on the TReDS portal.

Financiers Bid: Banks and financial institutions bid on the invoices, promising to purchase them at a discount.

Early Pay: When a financier purchases an invoice, the MSME is paid upfront, likely at a lower price than the invoice but considerably ahead of waiting for payment by the customer.

Benefits of TReDS

Improves Cash Flow: TReDS converts receivables into cash early, meaning business will continue to flow while maintaining the cycle of working capital.

Competitive financing access: MSMEs can access this through the bidding process, whereby they get competitively better terms than traditional loans.

No collateral required: While working capital loans may require security, TReDS is a security-free solution that hinges purely on the power of the invoice.

It strengthens relationships with buyers: The buyer participates directly in the transaction, setting up an open and collaborative relationship and, therefore, chances of subsequent business.

End

Working capital cycle is one of the very essential indicators of the health of a business. A business should maintain strong control over the cycle in order to preserve liquidity, avoid external financing, and keep oneself ready to capitalize on growth opportunities. Tools such as working capital loans and TReDS provide the required flexibility and financial support for the bridging of cash flow gaps and the boosting of operational efficiency.

In today’s dynamic business environment, an efficient working capital cycle is the key to thrival rather than mere survival. Use these financial solutions to concentrate on what really matters: drive growth and ensure long-term success