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What is Working Capital Management, and Why is it Essential?

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As per the combined data from the Udyam registration portal and Udyog Aadhaar Memorandum (UAM), about 10,067 MSMEs were closed between 2016 and 2022. One of the significant reasons cited for prevailing business failures includes inadequate working capital and poor management.

Working capital is indispensable to the proper functioning of a business. A sound and well-chalked-out working capital management goes a long way in determining businesses’ operational success and financial health. Hence, business professionals must emphasise balanced working capital management as it influences business profitability, liquidity and solvency. 

Working capital management and its importance

Besides knowing the meaning of working capital, one must know the importance it holds in the success of a business. Here are some reasons why robust working capital management contributes to business prosperity: 

  • Higher liquidity

The availability of considerable working capital determines higher liquidity, enables business entities to clear off existing dues in times of monetary urgency and prevents them from a complete shutdown. Firms that are efficiently managing the working capital can enjoy additional liquidity. Moreover, it helps them in allocating resources and enhances cash management. 

  • Improved profit margin

The profitability of businesses depends largely on the structured management of the receivables, account payables and inventories. Working capital management also helps firms avoid cash flow discrepancies. It helps maintain sufficient cash flow, meet operational activities and fuel business growth. 

  • Higher return on capital

Methodical working capital management is imperative to business advancement, strengthening returns and generating value. Every entity must be in possession of adequate working capital as that affects the owner’s equity and results in a higher return. In this context, individuals must know how much working capital does business needs. Moreover, business professionals must scrutinise their needs and opt for the right types of working capital.

  • Better creditworthiness

Balanced management of working capital ensures adequate cash flow, which helps businesses clear off existing liabilities and make timely payments to vendors and other trade partners, which will, in turn, help them receive favorable financing terms from suppliers and financial institutions. 

Inefficient working capital management will lead to investment in idle assets, which will adversely impact the business’s profitability and result in lower returns. Moreover, businesses will fall behind in their line of credit costs. In this context, individuals must know how to ensure that their business never runs out of working capital. 

In situations when businesses’ current liabilities exceed current assets, business professionals have to fall back on external credit options like business loans to boost their working capital management. It will help them access substantial loan amounts at a competitive interest rate. 

However, applicants must adhere to the important checklist before applying for a business loan to receive approval for the loan amount. Not adhering to the checklist will lead to rejection of loan application. 

Besides getting quick access to working capital, business professionals will also reap the advantages of the exclusive pre-approved offers extended by leading financial institutions like Bajaj Finserv. These offers expedite the loan application and save turnaround time of applicants. Intending individuals can check their pre-approved offers by submitting their names and contact details. 

To sum, working capital is a prevalent business metric that ascertains the efficiency, financial health and overall liquidity of a company and efficient working capital management is correlated to business growth. A business loan is an effective financing choice for helping businesses meet their capital requirements and expand their horizons, procuring inventories, recruiting skilled staff, etc. Altogether, this ensures higher liquidity, solvency and profitability.

In conclusion, effective working capital management ensures sufficient cash flow, helping manage daily business operations. It indicates the best possible regulation of receivables and payables to bring out the best financial results. 

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