{"id":2817,"date":"2019-03-27T11:43:28","date_gmt":"2019-03-27T11:43:28","guid":{"rendered":"https:\/\/blog.kredx.com\/?p=2817"},"modified":"2023-10-26T06:00:34","modified_gmt":"2023-10-26T06:00:34","slug":"how-to-find-a-sustainable-working-capital-solution","status":"publish","type":"post","link":"https:\/\/www.kredx.com\/blog\/how-to-find-a-sustainable-working-capital-solution\/","title":{"rendered":"Finding A Sustainable Working Capital Solution"},"content":{"rendered":"<p><span style=\"font-weight: 400;\"><iframe width=\"100%\" height=\"20\" scrolling=\"no\" frameborder=\"no\" allow=\"autoplay\" src=\"https:\/\/w.soundcloud.com\/player\/?url=https%3A\/\/api.soundcloud.com\/tracks\/878948656%3Fsecret_token%3Ds-FqH53GpHvb5&#038;color=%23ff5500&#038;inverse=false&#038;auto_play=true&#038;show_user=true\"><\/iframe>The market is ruled by working capital and companies require them to keep up with the growing competition. Not being able to identify the working capital needs of the company can lead to distress and even bankruptcy.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Now that the need for working capital is established, it is critical to understand the ways of acquiring it. It is time to move past the traditional method, which eventually might become obsolete, and look for something that aligns the urgency to access the capital. Taking note of this issue, we decided to get it addressed by someone who is a maestro in this field. Mr. Prasanna Madhyasata, Head of Enterprise Business at KredX has come up with a series of blogs which will guide our readers to understand the term \u2018working capital\u2019 and the means to acquire it. The first blog of the series, &#8216;Finding A Sustainable Working Capital Solution&#8217; educates the readers about the importance of working capital and how to identify the need for it.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In an ideal world when one runs a business, the realisation of funds immediately against the sale of any goods\/services and all related expenditures are paid only after the accomplishment of the sale of goods\/services. The services include payment to purchase raw materials, plant and machinery, spare parts and others like technology, manpower, logistics to name a few.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Today\u2019s business ideologies demand a far more effective financial assistance to reap the benefits. Businesses flourish as per the need, and market drivers and hence, the need for working capital arises. Finding a sustainable <\/span><a href=\"https:\/\/www.kredx.com\/what-is-working-capital\/\"><span style=\"font-weight: 400;\">working capital solution<\/span><\/a><span style=\"font-weight: 400;\"> has become a significant activity for a growth-oriented company and therefore, an organised working capital solution is the ideal path for taking the company\u2019s growth to newer heights. It\u2019s unfortunate that many good ideas and businesses have succumbed as they were unable to find a working capital solution. <\/span><span style=\"font-weight: 400;\">CRISIL\u2019s analysis of nearly 1,700 MSMEs (annual turnover up to Rs 2.5 billion) shows that their working capital gap \u2014 or the difference between current assets and current liabilities (excluding short-term bank borrowings) \u2014 has widened consistently since the financial year 2015. The working capital gap is estimated to be expanding<\/span><span style=\"font-weight: 400;\"> for the services sector at 16 per cent annually, compared with 13 per cent for the manufacturing industry. The reason is due to payment delays, especially in the services sector.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Liquidity is required for running the day to day operations in a good business model by bridging the gap between receivables and payables, keeping in mind the company\u2019s growth is working capital. <\/span><\/p>\n<h2><b>Working Capital \u2013 A Catch 22 Situation<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Traditionally, Indian businesses have always managed working capital gaps either by own funds, funds from friends and relatives, private financiers and through <\/span><span style=\"font-weight: 400;\">financial institutions<\/span><span style=\"font-weight: 400;\">.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">An unideal situation is when a business relies upon investing funds to meet the working capital needs as the amount raised, in most cases, is insufficient.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Borrowing working capital from friends and relatives don&#8217;t make a sustainable model. The cost of private financers is usually higher than the margins available in the business market and considered solely in a worst-case scenario.<\/span><\/p>\n<h2><b>Mundane and Outdated Strategies<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Financial Institutions<\/span><span style=\"font-weight: 400;\"> \u2013 India has a history of more than 100 years of financial systems, but in the recent past, we have been observing drastic changes in the Indian economy and hence the businesses. These factors must be taken note as far as solving the problem of working capital is concerned.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The current framework in the contribution of the financial sector towards solving the need for working capital to businesses in our country:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">A report driven by the financial statement restricts the access of liquidity to companies with a history of more than three years.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">A more technical approach to evaluation &#8211; concentrates on profitability.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Only stable companies with a standard percentage of growth are targeted for solving the liquidity problem.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Companies that are growing and are willing to provide additional security in the form of land and buildings, plant and machinery or any other kind of collateral will get access to liquidity.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Most of the promising and growth-oriented sectors that are indicators of healthy growth of economy are left out or ignored, in providing access to cash especially industries like logistics, warehousing and packaging, workforce and staffing, others include companies in service sectors, emerging corporates across various sectors,\u00a0etc.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The period between identifying the <a href=\"https:\/\/kredx.com\/blog\/why-working-capital-optimisation-is-essential-for-your-business\/\" target=\"_blank\" rel=\"noopener\">need for working capital<\/a><\/span><span style=\"font-weight: 400;\">\u00a0and getting the same from <\/span><span style=\"font-weight: 400;\">financial institutions<\/span><span style=\"font-weight: 400;\"> is long. Moreover, not a single <\/span><span style=\"font-weight: 400;\">financial institution<\/span><span style=\"font-weight: 400;\"> meets the entire need leading to multiple exposures. The whole work process and the cost involved in getting the same approved and managing becomes tedious.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Off-late, the Indian financial system is busy in tackling the current problems of their own like increased percentage in a stressed portfolio and liquidity issues.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">According to the latest proposal by the central bank through a draft, the guideline is to make all borrowers enjoying working capital limit in excess of Rs. 150 crore to compulsorily borrow through the demand loan route for at least 40% of the limit before touching other modes like cash credit, overdraft, <a href=\"https:\/\/www.kredx.com\/business\/bill-discounting\/\">bill discounting<\/a>,\u00a0etc.<\/span><\/p>\n<h2><b>Next Generation Radical Move<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">The economy has been shifting to a more organised and transparent way of running businesses. On the contrary, with re-structuring of direct and indirect taxes adding more taxpayers to the list, need of working capital from a legitimate source with a new and or alternate approach to access to <\/span><span style=\"font-weight: 400;\">liquidity <\/span><span style=\"font-weight: 400;\">has become the need of the hour.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">With the economy making great strides and growing at an exponential rate, newer concepts\/ideas leading to favourable emerging businesses and the country\u2019s consumption on both B2B and B2C increasing, <\/span><span style=\"font-weight: 400;\">solving the liquidity problem <\/span><span style=\"font-weight: 400;\">is something that businesses today expect.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Read more about the <\/span><span style=\"font-weight: 400;\">current trends<\/span><span style=\"font-weight: 400;\"> of tackling working capital gap and what alternate solutions are available in the market to meet the liquidity requirement of your growing business in our next blog \u2018<\/span><b>Winning tactics to overcome working capital issues<\/b><span style=\"font-weight: 400;\">\u2019.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The market is ruled by working capital and companies require them to keep up with the growing competition. Not being able to identify the working capital needs of the company can lead to distress and even bankruptcy. Now that the need for working capital is established, it is critical to understand the ways of acquiring [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":5861,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[35,127],"tags":[72,181,320,203,77,321,38,322,323,324],"class_list":["post-2817","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business","category-working-capital-business","tag-bill-discounting","tag-financial-institutions","tag-liquid-flow","tag-liquidity","tag-msmes","tag-what-is-working-capital","tag-working-capital","tag-working-capital-formula","tag-working-capital-gap","tag-working-capital-solution"],"_links":{"self":[{"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/posts\/2817","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/comments?post=2817"}],"version-history":[{"count":1,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/posts\/2817\/revisions"}],"predecessor-version":[{"id":13876,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/posts\/2817\/revisions\/13876"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/media\/5861"}],"wp:attachment":[{"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/media?parent=2817"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/categories?post=2817"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/tags?post=2817"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}