How to Increase Working Capital and Liquidity of Your Company?

Working Capital is the finances available to a company to run its day-to-day business operations. It is the money available to the company after paying off the current liabilities. Any deficit or loss in the Regular Working Capital of the company can adversely affect the entire business operations and thus the growth of the company.

Working Capital provides you with a clear idea of how the assets of the company are excessive or exceed the liabilities of the company. 

The Working Capital of a company is calculated in the following way:

Working Capital= Current Assets – Current Liabilities 

Why Working Capital is Important?

If you have good working capital available in your business, you can plan any growth strategies. Working Capital is important in all stages of business development and operations, starting from the purchase of raw materials to the production of goods, and finally to the sale of goods. 

All these business operations would require some financial investments and if at any stage those financial requirements are not fulfilled, the entire business operations are hampered.

To determine the health of your working capital you can use the following formula to derive a working capital ratio:

Current Assets/ Current Liabilities

If the Working Capital ratio is above 1.5, your regular working capital is healthy. However, if the Working Capital ratio is below 1, then it is implied that your business needs a working capital enhancement.

How to Increase Working Capital?

Having a streamlined working capital is not as easy as it seems to most of us. However, there are still some effective ways using which you can increase your working capital. The top ways how to improve your working capital are discussed as follows:

1. Shorter Operating Cycles

Operating Cycles include several stages between the purchase of the material till the receipt of money on the sale of finished goods. Having long operating cycles can require more money for proper channelization of the business and the receipt of payments will be delayed. 

Shorter Operating Cycles would decrease the expenses incurred between the stages and would also make the receipt of payments quicker.

2. No Overstocking

Overstocking of raw materials can adversely affect the working capital. At first, an amount more than required would be spent for purchasing the overstocked raw material and then extra money would be spent on the storage and maintenance of that raw material. Furthermore, if the overstocked raw materials get decayed or damaged, it would also hamper the smooth cash flow of the company.

3. No Unnecessary Expenses

Always monitor the business requirements and the situation of Working Capital before making any expenses. Unnecessary expenses can put holes in the pocket of the company by giving little to no return. Therefore, the business should prepare a budget and should strive to stick by it as strictly as possible.

4. Customer Credit Check

In most businesses, it is somewhat important to provide a credit facility to the customers to engage them with you. However, the credit limit and status should be checked timely. The payments often stuck in credit to customers can not get used in the business operations. This depletes the working capital and thus adversely affects the growth of the company.

5. Improved Collection of Invoices

The businesses should put a special emphasis on the timely collection of payment invoices and should also monitor the same. If customers are making delayed payments or not clearing their past dues, the business activity shall be put on hold with them till their past dues are not clear.

6. Try to Remain Debt Free

To improve your working capital, it is very important to remain as debt free as possible. Bad and prolonged debts deplete the working capital slowly. The interest payable keeps on increasing and their settlement becomes difficult with time. Thus, it is advised to either take small loans or settle the loans as early as possible to increase your working capital 

7. Bank Finance

Financial institutions undoubtedly help the business to grow and develop seamlessly. However, it would help if you looked for such financial institutions or banks which will get you a loan at a low rate of interest. This way cash flow will increase in your business and your liability for repaying the loan would decrease.

Also Read: Know About Working Capital Loan

Conclusion

Working Capital is the essence of any business. Healthy working capital would streamline the entire business operations of a company and ultimately help it to meet its financial obligations. The need to maintain good working capital is non-negotiable and thus, if you are an entrepreneur or a business entity, you should plan and prepare to increase the working capital.

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