Working capital is an indicator of a business’ financial standing in the short term and its operational efficiency. It is the available capital that an organisation can readily use in its day-to-day operations.
The lack of optimum working capital hinders the supply chain management of a business and signifies a lack of resources. Investors use the working capital balance sheet as a yardstick to gauge the monetary position and liquidity of a company. It is, therefore, vital for businesses to maintain sufficient working capital.
KredX offers integrated cash flow solutions that facilitate growth and expansion of businesses by way of meeting working capital requirements. Simply sign up, upload outstanding invoices, and gain quick access to funds within 24-72 hours*.
Working capital consists of two components – a) current assets and b) current liabilities. Current assets comprise those that a business can sell, consume, or exhaust within a financial year. On the other hand, current liabilities include those that a business settles in cash, within its financial year.
The mathematical formula to calculate working capital is -
Working Capital = Current Assets – Current Liabilities
The following example elaborates this concept -
Current assets and current liabilities will reflect on this company’s balance sheet as below -
|
Current Assets (Rs): Cash in hand Accounts receivable Inventories Current Liabilities (Rs): Accounts payables Short-term borrowings Accrued liabilities |
5,00,000 2,00,000 3,00,000 __________ 10,00,000 2,00,000 3,00,000 1,00,000 __________ 6,00,000 |
Here, the company’s working capital balance sheet can be ascertained by subtracting its current liabilities from its current assets.
This is how to calculate working capital balance sheet -
The amount of a company’s working capital changes over time due to varying operational situations.
There are two types of working capital for an organisation – positive working capital and negative working capital.
When a company holds more current assets than current liabilities, it has a positive working capital. This enables the business to fully cover its short-term liabilities, as and when they come due in the next twelve months. Positive working capital also signals the sound financial position of the entity.
On the downside, excessive positive working capital indicates an oversight by a company in utilising its resources. Additional funds parked in working capital reduce investment effectiveness and the organisation; thus, misses out on growth opportunities.
When current liabilities are higher than current assets, it means that the business has a negative working capital. It signifies that this company has incurred a significant cash outlay, which it is unable to meet. Negative working capital further indicates an unstable financial position.
If the working capital balance sheet remains negative for a considerable stretch of time, a company will struggle to meet its obligations and rely on borrowings, destabilising its financial conditions further. An effective way to mitigate this situation is to opt for invoice discounting.
KredX has helped over 15,000 businesses with more than 5,00,000 discounted invoices. We enable easy access to a healthy cash flow, so that businesses can operate, expand, and grow.
The working capital cycle, or WCC, is the length of time that a business takes to convert its total net working capital into cash. Companies typically seek to manage this cycle through an optimised collection of revenue from customers, selling-off inventory, and paying bills steadily, all of which augment its cash flow.
This cycle usually works for companies in the following way -
The working capital cycle can be calculated based on the above-mentioned information as follows:
The above calculation indicates that the company has its cash locked in for 15 days.
It is a business strategy ensuring that an organisation monitors and uses its current assets to the best effect so that it operates efficiently. Companies generally opt for external financing to manage their working capital, which includes -
Companies can avail these advances without pledging any collateral. These loans are available against higher interest rates, and require borrowers to meet strict eligibility criteria.
Businesses can avail a loan against property by pledging their commercial or residential property as collateral. These loans have a longer processing time, stringent eligibility criteria and no tax exemption.
It is a finance facility, wherein companies can avail advances on the payments owed by customers on their invoices. A business offers its outstanding invoices to a financing company or lender, which provides quick funding at a discounted rate. When customers complete their due payment with the business, the lender gets a portion of it.
KredX is a leading integrated cash flow solutions provider. Our invoice discounting service is collateral-free, which exempts businesses from pledging their assets. We ensure complete transparency and secure transactions with an easy digital process. At KredX, business owners can avail easy and effortless financial solutions. This enables meeting working capital balance sheet requirements efficiently.