The efficient management of working capital is an unceasing task for any organisation’s accounting and finance departments. Maintaining a steady inflow of cash is essential to fund the day-to-day activities of a business.
Moreover, to ensure a smooth flow of working capital, a business needs to comprehend the internal and external factors that directly impact its working capital decisions. Nevertheless, before delving into the internal and external factors, it’s imperative to know what is working capital.
What is working capital?
Working capital is the excess of current assets over current liabilities; it is a measure of an organisation’s liquidity position. Positive working capital denotes that an organisation has enough liquid assets to pay off the short-term liabilities and fund the daily operations.
If an organisation does not have surplus working capital, it is a sign that the business has to seek capital finance options such as a business loan to raise adequate funds and meet the short-term expenses. Examples of current assets include cash and cash equivalents; whereas, sundry creditors, bills payable are examples of current liabilities. After familiarisation with this concept of working capital, one must understand the factors that influence working capital.
Internal factors influencing working capital
Here are some internal factors affecting working capital of a business:
- Organisational efficiency
One of the key internal factors influencing working capital decisions is the organisational structure. Accounting personnel of some organisations end up utilising excess working capital without ensuring optimum production. However, there are other organisations that have an efficient structure and produce more goods and services with minimal working capital. Setting up a well thought out structure is necessary for efficient utilisation of working capital.
Business owners who are struggling to meet the organisation’s capital requirement can refer to this businessman’s guide to working capital loans and avail financial assistance to ensure a smooth flow of daily activities.
- Investing borrowed funds
Organisations often raise funds from various sources to purchase new machinery, build new storage facilities, expand their operations or introduce a new product line. Such investments of borrowed funds have a direct impact on the working capital management of a business. Efficient utilisation of borrowed funds leads to the overall growth of the organisation.
- High growth rate
Businesses that are growing at an exponential rate have to fulfil the growing demand for products and services. However, to increase productivity and facilitate effective distribution, the organisation requires a higher amount of working capital. Businesses can raise funds by availing financial assistance in the form of working capital loans from lending institutions to fulfil the working capital requirement. Here’s why you should choose a working capital loan to fund business operations.
External factors affecting working capital
Here are some external factors affecting working capital requirement:
- Interest rates
Raising funds to finance the daily operations can be a challenge for organisations owing to the high interest rates charged by lending institutions. Although a business might end up borrowing the funds, their financial capacity might not allow them to repay the EMIs on time.
However, financial institutions such as Bajaj Finserv has introduced unique credit facilitates such as the flexi loan which enables business owners to withdraw funds as per their requirements and pay interest only on the amount they utilise.
Moreover, such financial institutions also provide attractive pre-approved offers that simplify the application procedure for availing financial assistance. These offers are available on a wide range of financial products, including business loans, personal loans and credit cards. Check your pre-approved offer now by entering some basic information.
- Diverse economic climate
Dynamic market conditions, changes in the global economy and various other associated risks have a significant impact on any organisation’s working capital requirements. A business with expansive operations has to deal with greater risks than small-scale businesses. Hence, organisations must be able to adapt to the changing economic climate to produce optimum performance.
Now that you know what is working capital and what are the factors influencing it, make sure to manage funds efficiently to maximise the organisation’s growth.