Every business needs a smooth day-to-day functioning and working capital is the lifeblood for the efficient functioning of daily operations. It is simply the difference between current assets and current liabilities. No matter the size of the organization, it plays an important role for all. It is one factor that is generally considered by almost everyone from management to prospective lenders.
Working capital makes it easy to understand the financial health of the company. Besides smooth day-to-day operation, a positive working capital makes it easier for a company to obtain a line of credit as it shows the liquidity of the business as a whole and whether a company will be able to meet its short-term obligations. Whereas a negative working capital implies that, the company is highly leveraged.
Advantages of Working Capital for Business Owners
- It improves the business’s financial credibility, which makes it easier to obtain business loans.
- It also helps a business to maintain a productive and effective image.
- All businesses face an issue of cyclicity; positive working capital can help them manage bad times.
- It ensures perpetuity in business operations.
Other things where positive working capital can help is the payment of proceeds to shareholders, maintenance of goodwill of the business and payment of any other obligations if and when arises.
Types of Working Capital
Gross Working Capital: It is the current asset as stated in the balance sheet; these are the assets that can be quickly converted into cash, i.e. within one operating cycle. For instance, cash, bills receivables and short-term securities.
Net Working Capital: This is simply current assets minus the current liabilities (short-term notes, payables, accruals, etc.. are current liabilities).
Fixed Working Capital: Fixed or permanent working capital is the minimum amount of capital required to be maintained in the business. This capital varies with the size of the business.
Temporary Working Capital: It is the additional working capital required to meet the special events or seasonal aspects over and above permanent working capital can..
Understanding the Need for Working Capital
It is the circulating capital of a business; it is required to perform day-to-day functions efficiently. Business owners need working capital for:
- Cyclical or special events of the businesses
- Ability to face crises in regular business flow; example: COVID-19
- Smooth flow of business; sometimes an extra delay in payment from buyers may create a gap in the cash flow cycle
- From time to time, businesses may take up some additional projects where they require some working capital (Example: running an additional advertisement campaign)
Having established the need and importance of working capital and the various advantages that business owners have of maintaining an optimal level of working capital, we need to understand various factors that affect business that sometimes lead to a working capital deficit. To maintain the balance between cash flows and have efficient liquidity and to maintain the proper flow in business process, business owners may have to find a source to finance working capital.
There are various options available for working capital financing in the market; business owners need to develop clarity when it comes to financing the working capital requirement.
Kotak Mahindra Bank has various segments for working capital financing:
- Channel finance
- Project finance
- Facility against credit card receivables
- Transport, warehousing and logistics finance
- Dealer finance
- Infrastructure finance
If you wish to apply for working capital loan, you can log on to our official website and browse through the options. After finding the correct fit, you just have to fill the online form and our representative will get in touch to provide clear information about the documentation and eligibility criteria. Depending on the eligibility, we will try to formulate a customized solution for you.
Kotak Mahindra Bank understands that working capital requirements are generally urgent, so we strive to make the process quick and hassle-free with minimal documentation. A dedicated relationship manager helps to make the process easy for business owners. The differentiator is our ability to understand the customer’s needs completely and offer personalised solutions.