Want to Know About Net Working Capital and Its Calculation?

Net working capital, also known as WC, is a financial metric influencing a business’ liquidity and profitability. It is the difference between the aggregate amount of current assets and current liabilities of any company.

Current assets comprise of cash and cash equivalents including other liquid assets which are readily convertible to cash. On the other hand, liabilities include all the short-term debts and other future payables. So, liabilities are settled by a current asset or by creating a new liability.

To have a smooth run in business, owners must know how to calculate working capital. It gives a general overview of the company’s ability to utilise all assets constructively.

One can calculate net WC, by excluding debts from assets, i.e. current assets minus current liabilities. The formula for the same is Working Capital = Current Assets – Current Liabilities.

Substantial WC indicates the availability of adequate short-terms funds from current assets. It is directly relevant to the sound financial state of the business.

On the other hand, if the net WC figure sees a decline, i.e. a negative value, then the business seems to have a financial instability and lacks funds to pay off its short-term debts. So, in short, the working capital can make or break a company.

Breaking down how to calculate working capital for better comprehension:

As it measures a business’ operational efficiency and short-term monetary health, working capital can be calculated in terms of ratio too.

With the same variables, i.e. current assets and current liabilities, a businessperson can get the WC ratio. When the ratio is less than 1, the market credibility of a business signifies negative WC along with potential liquidity issues.

Conversely, a good net WC ratio is considered to be between 1.2 and 2.0. However, if the ratio is above 2, it indicates that the business enterprise is unable to utilise its excess assets effectively for a better return on investment.

Few things to remember:

  1. Net WC ratio is the litmus test to access any business’ short-term liquidity. So, companies which manage their WC efficiently can boost easy cash flow to suffice maturing short-term expenses and upcoming operational costs.
  2. Three main components of WC are – accounts receivable, accounts payable and inventory. Striking a balance between these factors is essential. A business can run at a loss if these 3 financial parameters are not balanced correctly.
  3. To cater to the funds of WC, a company should look for working capital loans through various financial channels. NBFCs including Bajaj Finserv offer working capital loan to infuse money in a business.

More insights:

Some providers such as Bajaj Finserv offerworking capital finance with the Flexi-hybrid feature allowing a borrower to pay interest only on the utilised amount instead of the total sanctioned value. Here, borrowers need to pay only the interest as EMIs reducing the repayment cost up to 45%. Borrowers also benefit from customised pre-approved offers on business loans, personal loans, mortgage loans and other financial products and services.

How can a business use a working capital loan?

As the name already suggests, the loan is specifically for the purpose of managing gaps in working capital of a business. However, it is upon the business to decide how to use the capital. The organization can also use the borrowed capital for funding their business growth related activities, buy a larger office space, upgrade the machinery, and even to acquire a new business.

How to avail working capital loan?

NBFCs follow technology-driven methods to make loan application process easier. Furnish few documents online like KYC documents, business vintage and relevant financial documents to avail the loan within 24 hours.

The loan amount can value up to Rs. 30 Lakh with a convenient repayment schedule ranging from 12 to 60 months. Moreover, applicants between 25 and 55 years of age can apply for this collateral-free business loan.

Things to remember before applying for a working capital loan:-

As evident from the above paragraphs, the said credit scheme is extremely beneficial for business. Hence, any organization facing a difficulty in managing their operating cash can apply for the loan to make the ends meet. However, there are a few things which should be kept in mind before applying for the said credit facility to ensure highest chances of approval.

  • A good CIBIL score is a must. Anything below 750 is not acceptable and if that’s the case with your credit score, it’s better to hold on your loan application rather than continue with it.
  • An unblemished credit history is also crucial for approval. So, check you credit history before applying and ensure everything is as good as it can be.
  • Gather all the documents in advance. The absence of even one document can get your application rejected. Hence, avoid committing such mistake.
  • Lastly, check your loan eligibility using the working capital loan eligibility calculator and trim your expectations in accordance with your repayment capacity.

Bottom line: One can boost one’s working capital to eliminate financial discrepancies and create a positive financial situation. A businessman can also expand his business with the loan amount in the following ways:

  1. Machinery acquisition.
  2. Hiring extra workforce.
  3. Growing the existing business to another place/city.
  4. Debt consolidation, etc.

For those struggling to maintain their WC for running the business, they should first learn how to calculate working capital accurately. If one witnesses a shortage in liquidity, one can opt for the loan and ensure working capital availability for a smooth running of the company.

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