Working capital can be used as a scale to measure the overall efficiency and productivity of a business entity. The working capital of any organization consists of all its assets minus the liabilities. Nevertheless, different types of working capital play essential roles in an organization's smooth and efficient functioning, and we'll tell you more about them in this article.
Working capital also indicates the liquidity level of a business for successfully carrying out its day-to-day expenditure while managing accounts, cash, inventory, and due short-term debts.
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Importance Of Working Capital
As discussed above, working capital is essential for a company to meet its short-term obligations and pay its employees, suppliers, and meet other financial obligations such as making payments and paying taxes even. It is also important because:
- Working capital can be used to fund business expansion.
- Different types of working capital affect the organization's ability to face challenging situations, seasonal sale fluctuations, and much more. For instance, a company can be prepared by making extra purchases from the suppliers for an upcoming busy month while meeting its other financial obligations when comparatively less revenue is generated.
Different Types of Working Capital
The different types of working capital are based on the balance sheet of the company. Some of the important types that you must know about are:
1. Temporary Working Capital
Temporary working capital consists of the assets required by any organization for a very short period. For example, there is an immediate need for more products, decorations, and festival-specific assets during the festive season. These requirements are considered temporary as they keep changing as per the business's operations and market situations. If you need temporary working capital, then opting for short-term loans to fund your requirements would be the best option for you, as you can repay it soon after your business starts generating revenue.
2. Permanent Working Capital
Managing fixed assets as compared to current assets is simpler since determining financial requirements for fixed assets requires only the cost of the asset. Whereas for current assets, it is completely different as the value of current assets is dynamic, and it can sometimes get a little tricky to predict the value of it. Thus, to resolve this complexity to some extent, companies find a cost that has been constant through the years by considering past trends. This amount is considered as the fixed or permanent working capital, and it is the minimum working capital required by a firm to function smoothly.
3. Gross & Net Working Capital
Gross working capital consists of a sum of the firm's assets. These assets are such that they can be converted to cash within a year. The assets typically comprise of:
- Accounts Receivable
- Marketable Securities like stocks
- Short-term Investments
Net working capital is the difference between the existing liabilities and the gross working capital owned by a company.
The bottom line is that to expand, sustain and establish your business in the market, you must have stable working capital. You can also reach out to us at Kinara Capital, as we believe in transforming livelihoods and local economies by providing quick and flexible collateral-free loans and working capital loans to small business entrepreneurs in India.
With over Rs. 2,000 crores of loans disbursed across 3,000+ pin codes, we have brought a positive change in the lives of thousands of small business entrepreneurs. We have generated an incremental income of Rs. 700 crores and supported more than 250,000 jobs by driving inclusion and sustainable growth.
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