As per the recent reports, small and medium-sized businesses account for over 30% of India’s total GDP. From digital opportunities to Government-backed schemes, all these factors have played key roles in India’s SME sector’s immense growth. However, considering the current market situation, the industry has been struggling to gather adequate working capital to support their business ideas and future strategies.
These funds are required to start a new venture and for the established companies to maintain smooth daily operations. Young entrepreneurs who are just starting out should have a detailed understanding of the working capital and ways to improve it in order to take their business to the next level.
Importance of working capital
In simpler words, working capital signifies the liquid funds every enterprise utilises in order to achieve their business goals. Mostly, entrepreneurs rely on business loans to gather sizable funds as the working capital for their new ventures. However, it is advisable to understand in which ways these available funds can be used.
Following are the reasons why working capital is important:
- Goodwill enhancement of a business: Even though a business involves daily maintenance and acquiring funds to support the company strategies, creating a value addition is equally important to make it stand out among your peers. Obtaining a working capital loan comes as an ideal solution to enhance your market presence and promote your services or products to reach the target consumers.
- Liquidity crisis: Apart from handling the regular operations, every small enterprise needs to face certain additional expenses. At times, excessive requirements and implementation of specific campaigns result in a monetary crisis, which can be covered with these funds.
- Investment plans: Every business goes through certain investment plans, and by utilising the working capital, it becomes easier to maximise returns. From investing in the right machinery to services, the reasons why capital finance is necessary for small businesses are innumerable.
Apart from these requirements, keeping sufficient working capital also helps earn short-term profits, improve creditworthiness by paying the vendors on time, strengthening the work culture, etc. Keep in mind, most small business owners struggle to manage their working capital smoothly initially. Here is how you can improve it:
- File your invoices on time
The operating cycle plays a vital role in increasing working capital. Therefore, try to make this cycle as short as possible. Make sure to obtain the payment within a stipulated time to end the operating cycle so that it does not hurt your cash flow.
- Restrict additional expenses
Try to incorporate strategies on how to limit the additional liabilities since working capital loans already require you to continue paying EMIs every month. List down all the necessary expenses and keep your non-essential cash spending at bay.
- Maintain a good rapport with creditors
This mainly helps you to maintain a healthy credit score since you get to communicate with them when there are cash flow issues. You can also negotiate payment terms and tenure so that it does not affect your business goodwill, and increases the possibility to enhance working capital.
However, to help the small business owners arrange an adequate amount to support their businesses, top NBFCs have introduced pre-approved offers that make financing quite hassle-free. These offers are available on different financial products such as business loans, credit cards, personal loans, etc. You can simply provide necessary details like name and contact number to check your pre-approved offer and get better deals on your working capital loan.
Keeping a check on your working capital is one of the best ways to avoid a business financial crisis. Additionally, it is advisable to be strategic while obtaining funds so that it does not hamper your creditworthiness in the future.
