FindItMore | A working capital is the amount of money that a business requires to cover the day to day operational costs of a business. Some opt for a working capital loan from time to time when they have difficulty in keeping a steady cash flow and use the money from the profits to pay back the loan and so it is considered one of the best funding options for business growth.
After all, irrespective of the production or sales, or payment from customers, there are often some aspects that have to be taken care of like paying rent of the premises, paying the electricity bills or paying the salary of the employees. However, many new entrepreneurs do not a sound idea on how to manage working capital, and it could lead to financial upheavals in the business. Here are some tips to manage working capital better:
Ways of Increasing Working Capital
A business could increase its working capital by steadily setting aside a fixed portion each month when the profits are high and then use it to cover the operational costs of the business when the peak season is over and the sales drop. This amount should not be touched in the initial days of the business and when an emergency arrives, one will find that a corpus has been built which can be used to tide over a number of financial issues.
Those who are new to business might often have queries regarding what is working capital and how is it calculated. The best way to manage working capital is to calculate what are the mandatory costs that the business would need to cover each month. This includes rent of the premises, salary of employees, electricity and other kinds of bills and purchase of raw materials.
There could be some other forms of expenses as well according to the nature of business- like some maintenance work or covering the transportation costs, if any. Once these compulsory expenses are taken into account, one should try to set aside this amount from each month’s profit and then use it for next month’s working capital. A corpus should be built from the surplus profit over time, and one day, there would be enough to tide over any low phase in business.
How Can A Company Improve Its Working Capital?
A company could improve its working capital by cutting down secondary expenses of the businesses for a while. Try not switching on the AC so frequently perhaps, or buy raw materials wholesale to get the best prices. Once these secondary expenses are reduced, there would be enough to spend on the compulsory aspects when business is slow.
After a few years, when your business starts running successfully and you can stop worrying about cash flow, you can splurge all you want. There are other ways of increasing working capital as well, like applying for a loan in the beginning and then increasing the production so that the surplus profit can result in the payment of the loan as well as create more cash flow for the business in the subsequent months.
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