How to Improve Working Capital?

[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.

[Published by: www.caconnect.in]