[Published by www.caconnect.in]
1. What is
Working Capital?
Working Capital is the Capital needed to
fund normal, day-to-day operations of a business.
A positive Working Capital ensures that an
organization is able to continue its operations and it has sufficient funds to
satisfy both short-term expenses and upcoming operational expenses.
Gross
Working Capital equals to Current Assets and Net Working Capital is Current Asset minus Current Liabilities.
The
Working Capital Cycle means time taken to turn net current asset and
current liabilities into cash.
If Working Capital Cycle is longer, the
cash will be tied for a long period in the business and Vice Versa.
2.
How to
Improve Working Capital?
·
Issuing Shares for Cash:
How
it Works
|
Risk
Involved
|
Issuing Shares for Cash will not
increase Current liabilities but will increase level of Current Asset.
|
Liquidity of Ownership rights
|
·
Replace
Short-Term Debts with Long-Term Debts:
How
it Works
|
Risk
Involved
|
Short-term Debts directly increase the
Current Liabilities; Using Long-Term Debts in place of Short-term Debts will
help to keep amount of Current Liabilities low.
|
Generally Long-Term Debts carry more
Financial Risk over Short-Term Debts
|
·
Sell
Long-term Assets for Cash:
How
it Works
|
Risk
Involved
|
Long-Term Assets do not form part of
Working Capital, so selling Long-Term Assets for Cash will directly increase
amount of Working Capital.
|
Long-Term Assets are required in a
business for day-to-day operations, unnecessary selling of Long-term assets
will hamper normal operations of business
|
·
Earning
Profits:
How
it Works
|
Risk
Involved
|
The most commonly method to enhance
working capital is by earning profits. On one hand, it will increase the
owner’s capital and on the other hand, it will increase the current asset of
organization.
|
It is well-known saying, “Higher the
Risk, more will be the profits”. So there is always a business risk
associated with earning profits.
|
·
Accounts
Receivables Management:
How
it Works
|
Risk
Involved
|
Accounts Receivables are generally
stated after deducting some provisions for bad and doubtful debts. The
Working Capital can improve, if the organization is able to collect amount
more than expected.
|
Provisions are always made on
past-experiences and market scenario, so it is very difficult to manage
accounts receivables.
|
·
Settling
Short-term debts for amount less than expected :
How
it Works
|
Risk
Involved
|
If Organization some-how manage to get
some discounts from the short-term debt providers, the discount earned by the
organization will serve as indirect income for the organization and thereby
improving working capital.
|
Whenever an organization earns some
discount, it has to face certain terms & conditions like early payment,
such cases should be properly evaluated.
|
·
Manage
your Inventory:
How
it Works
|
Risk
Involved
|
Avoid overstocking inventory; it will
lead to unnecessary blockage of working capital. Set a maximum level for all
the stock, do not order further stocks until you reach the safety level.
|
No Risk Associated, it’s a cost saving
measure.
|
·
Reduce
Fixed Costs:
How
it Works
|
Risk
Involved
|
Fixed Cost such as Rent, Salary,
Interest, Insurance Expense etc. should be checked periodically. Try to save
fixed business cost.
|
No Risk Associated, it’s a cost saving
measure.
|
