Net working capital is the difference between an individual’s current asset and current liabilities. Business owners keep track of the capital to determine their liquidity strength. Technically, a reduced NWC indicates that the business operations could come to a standstill or suffer losses.
Here are some factors that a firm owner must know that influences net working capital requirements.
Factors that influence the net working capital requirements of a business
Nature of business operation
Irrespective of the size, an entrepreneur needs to decide business type before calculating the working capital requirements. For instance, a retail shop or trading firm would require less working capital depending on the length of an operating cycle.
Comparatively, a wholesaler would need substantial capital as they have to maintain the inventory, purchase assets, sell goods on credit to increase an operational cycle length. Judging the gap between the liabilities and acquisitions, the company can decide net working capital requirements.
Business cycle instability
The net working capital is significantly dependent on market conditions. The subtle rise in monetary flow or economic boom can create prospects for more production, stock refills, debt clearance, etc. This indicates a need for substantial working capital. Comparatively, during a depression period, entrepreneurs can manage their business flow with minimal capital.
In this regard, checking tips to manage working capital for one’s service business or related operation would be a smart fund management method.
Seasonal requirements and raw materials
The net working capital is further based on seasonal changes and requirements. As companies produce and sell goods throughout the year, balancing liquidity becomes critical. For instance, the demand for woollen items or blankets would be higher in winters, forcing more production and fast supply. This makes an entrepreneur check the difference in his/her firm’s net working capital.
Again availability of raw materials and inputs removes pressure on working capital. In certain situations, an individual can also use the surplus from gross working capital and manage these requirements.
The market is competitive, where managing funds and customer needs become essential. Here maintaining the inventory, production cycle, and service requires a stable fund flow. Failing to reach the service on time would give a chance to the competitor to overtake profits.
Inflation can lead to a rise in the cost of raw materials and labour cost, thereby increasing the need for working capital. However, if a firm can maintain the balance in net working capital or increase its product price, managing the business operation would be easier. Using the savings recklessly or availing multiple loans are some of the mistakes to avoid when managing working capital for your business.
The production cycle indicates the time required to convert raw materials into finished products. Higher production time would cause blockage in revenue generation and working capital.
Credit flow is the smooth exchange of cash in business proceedings. Typically, individuals depend on clients, financial institutions and net working capital to manage the liquidity. A company can easily operate with less working capital if it follows a short-term credit policy.
However, if managing credit scale becomes difficult, one can look for alternatives like a business loan. NBFCs like Bajaj Finserv offer such credit against simple eligibility and minimal documentation.
They also extend pre-approved offers that make the application process swift and hassle-free. Ideally, such offers are levied on credit forms like business loans, personal loans, etc. Check your pre-approved offers by entering a name and contact number.
Thus, business owners can follow the seven factors discussed above to manage substantial net working capital without hassle.
Several factors may affect a business’s net working capital adversely, like inadequate supply, unpaid invoices, etc. Hence, managing these loopholes becomes an important task for an entrepreneur.
At times, businesses must look for a sustainable financial source like a business loan that can tide over the liquidity crunch and facilitate lucrative investments. Since net working capital is calculated using line items marked in the balance sheet, evaluating current obligations and capital requirements becomes essential.