working capital needs of a business
Business

How to dispense the working capital needs of a business?

Running a business is a full-time job. Unlike the employees, the owner does not get to take the weekends off. The thoughts of his business are continually running through his mind. It is because when an emergency may come, cannot be known so, and the owner always has to be prepared.

Being prepared would mean what? Will it mean that the business will not run into losses? Or will it mean that the income will only rise? The answer is sadly no for both the questions. A company can and will have to face losses at some point, and the income will always not be on an upward slope. That is the truth of the matter, and nobody can say otherwise.

Focusing on the income aspect, what decides the income for a business. I think it is in sales. Through selling its products and services, a company earns the entirety of its revenue. The more a business sells its products, the more revenue it will generate. Higher revenue brings higher profits along with it.

Now, what do the sales depend on? Indeed, the manufacturing process. Because if the business is making goods, then only can it sell them. No manufacture would mean no sales.

So, what do you think is the most integral part of any business? What is the heart and soul of it? I believe it is manufacturing. And the making of products is solely reliant on the working capital. Now, what is that?

WORKING CAPITAL

Working capital is the money that is allocated from the business capital to pay for the day-to-day financial needs of the company.

It is measured by deducting the current liabilities from the existing assets.

In a more straightforward sense, the working capital provides funds for those business needs that are essential for keeping the business operational. They are usually short term needs that are for less than a year.

The critical proponents for which the working capital is dispensed are;

  1. to pay for inventory, both the raw material and the goods that are in the process of manufacture.
  2. to pay for day-to-day operating expenses like employee salaries and vendor payments.

HOW TO GET WORKING CAPITAL FUNDED?

The working capital fund is the most basic requirement of a business. Without it, the business is like a fish without water, a bird without wings or a man without his wife. The WC is indeed the driving force of the company.

There are a lot of ways through which you can maintain a healthy WC fund for your business.

  • ADVANCE PAYMENTS

Getting upfront payment from the buyers is the first way to have sufficient balance to perform your operations. If you cannot get a full advance, then at least aim for getting more than half as payment.

For instance, assuming you have a furniture business. You have just got a contract from a school to make 1000 desks for the students. You are okay with the timeline and design asked by them. However, if you do not have enough funds to convert those desks from paper to reality, you are lost. The advance payment can help you overcome this problem with ease.

  • TRADE CREDIT

Whenever a manufacturing firm wants to start a new line of merchandise, it would need a lot of raw material. Suppliers provide this material. If your company has good relations with the vendors and suppliers, and impeccable goodwill in the market, any vendor would give you with a line of credit, also known as trade credit. This form of credit gives you enough time to make the goods and sell them in the market. Once you have your revenue, you can make the outstanding payment.

  • LOANS

Loan acquisition is the most common way of raising funds, not just in business, but also in ordinary life. You can apply for a working capital loan from any bank or financial institution. Remember like the working capital fund, and the loan is also short term.

Apart from this, a new trend has also emerged in the present. A guaranteed payday loan from the direct lender for bad credit has become quite popular in the business setting for day-to-day needs. Here, payday is referred to as the salary day, so the loan is to be repaid within the next 30 days. Unlike trade credit, a business need not have an impeccable credit history to avail it. There are also no obligations upon the borrower but one, that he pays the loan back.

For any business to grow and prosper, finances are crucial. Working capital is one such aspect of business that can make it or break it. Everything can be looked over for the time being, apart from the operational needs. If a manufacturing company is not making goods, do you think it can grow? So, prioritise your working capital needs, and rest assured all the other aspects will start falling in line.

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