Working capital is a measure of how efficiently a small business is in operation- it can be defined as the difference between the current assets owned and the current liabilities being serviced. Among current assets, we can include any available liquid cash or its equivalent, bonds, equity or other market securities or inventory. Obligations like supplier bills, short term debts, utility expenses, taxes, rent and debt are included among liabilities. There should be a healthy difference between the assets and the liabilities of an establishment in order for it to keep afloat, to function normally as well as to be profitable.
It goes beyond doubt that the finances of a small and medium sized enterprise are not always consistent- there are phases when the market is low, leading to a limited influx of profits whereas in times of high demand, the cash registers are always ringing. During times of financial crunch, a lot of small business owners opt for business finance solutions to keep the operations running smoothly.
Business finance can be obtained from lending institutions like banks or Non-Banking Financial Companies (NBFCs). With the increasing number of small enterprises that are coming up in India, these lenders offer a lot more than merely helping small business owners make ends meet in times of financial need. They provide loans and lines of credit with affordable rates of interest and flexible lending terms and repayment options.
Before availing such a working capital loan for small business of the enterprise should be determined precisely as it helps in borrowing the right amount.
Given below are the primary factors that need to be considered while assessing the working capital needs of a small business:
The type of business should be considered as the working capital needs can vary significantly depending on whether the business is product or service based.
Cycle of Operations
An efficient cycle of operations means that liabilities are cleared much faster and current assets are expanded and converted to liquid cash or its equivalent quicker.
Based on the business targets and the achievables for a particular season, the financial needs of a business can vary and so can the working capital required for business to execute the plans to achieve the same.