Supply Chain Finance: Working Capital
Working capital reflects the amount of money businesses have at their disposal to cover immediate expenses. It is a financial metric that gives a fair projection of a business's current financial standing.
It is after the pandemic that several businesses are facing working capital challenges. The economic instability afterwards has affected all sorts of financial transactions and disrupted the supply chain system. Hence, companies must be vigilant about their working capital requirements and optimise them to continue business operations smoothly. In this regard, signing up with KredX and uploading invoices will instantly help businesses gather the necessary working capital.
What Is Working Capital?
Working capital is integral to the proper functioning of the business. It helps cover a business's short-term expenses, manage inventories, make payments, etc. The absence of adequate funds will lead to increased attrition rates, untimely payments, etc. Therefore, working capital plays a pivotal role in business and is essential for enhanced earnings and the firm's overall profitability.
Working capitals help businesses bridge financial gaps in a lean period and carry on with operational activities. However, as this financial metric determines the financing standing of a firm, business owners and financial analysts must keep it in check.
The most convenient way to analyse the working capital requirement of a company is to check the company's assets versus liabilities.
Importance Of Working Capital
The availability of working capital determines a business's liquidity and short-term financial stability. Business bodies with robust working capital have the potential to grow and invest. On the other hand, inadequate working capital leads to a shortage of resources and a business's inability to clear short-term obligations.
Working capital boosts liquidity and facilitates smoother business production. Moreover, it ensures optimal utilisation of fixed business assets. It also helps maintain a cash reserve, allowing businesses to meet contingencies.
Types of Working Capital
Here are the following categories under Working capital:
Permanent Working Capital
The amount of permanent or fixed working capital is based on the business's size, growth, and production scale. It is the minimum current asset required to continue day-to-day business operations effortlessly. The portion of the working capital remains tied to the existing assets to ensure that business operation remains afloat.
Variable Working Capital
Variable or fluctuating working capital is the amount invested in a venture for a short span. This additional working capital is used to bring changes in business production and sale activities and differs as per the change in business sizes and current assets.
Regular Working Capital
Regular working capital is the minimum fund that business bodies must maintain to continue daily business operations, including salaries, payments, and expenses related to processing raw materials.
Reserve Margin Working Capital
It is also known as cushion working capital that a business needs to sail through unforeseen circumstances. It is the amount kept aside to mitigate business-related risks and sustain during trying times.
Gross Working Capital
Gross working capital is the total amount of funds invested under the business's current asset. Simply put, it is the aggregate amount of assets currently available in a company, which includes-
- Short-term investments
- Marketable securities
- Short-term investments
Net Working Capital
It is the amount by which the current asset of a firm surpasses the current liabilities. While current assets include inventory, raw materials, cash, etc., current liabilities consist of accounts receivable and payable.
How To Manage Working Capital?
Working capital management is a critical facet responsible for the continuity of the supply chain. Therefore, irrespective of a business's size and operation scale, it is essential for business bodies to manage the working capital.
A well-managed inventory is the most effective way to improve a business's cash flow. Avoiding stockpiling and reducing slow-moving inventory will help to free up the cash flow.
Business bodies can manage their working capital by enforcing payment discipline. Improved payable performance is the significant leverage to enhance working capital requirements.
Electronic Payables And Receivables
An effective measure to manage working capital is to streamline the invoicing processes. Reassessing invoicing methods will help mitigate business inefficiencies and payment delays. In addition, the automated payment process will lead to cash efficiency and expedited cash conversion cycles.
Another effective strategy for allowing individuals to raise business funds is to opt for invoice financing. Under this strategy, business owners can raise funds against unpaid invoices. Invoice discounting platforms like KredX will help businesses mitigate the working capital gap through bill discounting.
How Supply Chain Finance Can Boosts Business Working Capital?
Supply chain finance is an effective means of boosting the working capital of a business. It balances the entire business ecosystem and mitigates the financial gap between buyers and suppliers.
Businesses seeking to boost their cash flows can fall back on India's largest supply chain financing company, KredX, and get instant working capital to manage their payables and receivables. The company empowers businesses with customer-specific supply chain finance solutions and resolves all working capital hindrances.
Working capital reflects the liquidity scenario of a company that shows the financial health of a company. Supply chain financing platforms like KredX helps businesses raise adequate working capital for sustenance and growth.