Working capital, also termed as business capital, is the net amount that is used in the day-to-day operation of your business. To keep a smooth operation, it is essential to keep your business capital regulating and maintain proper cash flow throughout the organisation.
To calculate the available capital you can make use of a working capital formula, which is the difference between your current asset and your current liability.
What is the current asset of a company?
Current assets are properties that can be sold, utilised, consumed or converted in cash. The major components of such asset a company holds are:
- Liquid cash.
- Payments to be received.
- Short-term investments.
- Stock or inventory.
- Payable interest (collected against the money given as a loan to another organisation).
What is the current liability of a company?
Liabilities are considered to be a company’s financial obligations that are supposed to be due in one operation cycle. Some major components of current liability of a company are:
- Payments to be made
- Required expenses
- Short-term debts
To understand the calculation of business capital, consider the examples given below.
Example 1.
Assets
- Cash in hand = Rs. 5 Lakh
- Payments to be received = Rs. 1 Lakh
- Short-term investments = Rs. 50,000
- Stock or inventory = Rs. 1 Lakh
- Payable interest = Rs. 50,000
Total asset = Rs. 8 Lakh
Liability
- Payments to be made = Rs. 1 Lakh
- Required expenses = Rs. 50,000
- Short-term debts = Rs. 1.5 Lakh
Total liability = Rs. 3 Lakh
Using the working capital formula, your net business capital in this situation will be Rs. 5 Lakh (Rs. 8 Lakh – Rs. 3 Lakh)
Example 2.
Assets
- Cash in hand = Rs. 2 Lakh
- Payments to be received = Rs. 50,000
- Short-term investments = Rs. 50,000
- Stock or inventory = Rs. 1.5 Lakh
- Payable interest = Rs. 50,000
Total asset = Rs. 5 Lakh
Liability
- Payments to be made = Rs. 1.5 Lakh
- Required expenses = Rs. 1.5 Lakh
- Short-term debts = Rs. 3 Lakh
Total liability = Rs. 6 Lakh
Using the working capital formula, your net business capital in this situation will be Rs. (–) 3 Lakh, which is known as the negative business capital.
What is negative business capital?
Negative business capital or negative working capital states that your business lacks adequate assets to clear all debts and manage financial requirements and does not hold the required cash flow.
Hence it is essential to manage your business capital to prevent falling into a debt trap. Shared below are some tips to manage working capital for your business and improve it.
- Prevent from holding unnecessary inventory
Consider clearing your stock and convert them into cash to increase your working capital. You can also liquidate your long-term assets to increase the cash flow in your business. Collect the amount you are to receive from your dealers and suppliers in a short period.
- Consolidate your debts
You can opt for debt financing for your business to clear all your outstanding dues. Consider availing advances to consolidate your debt. Financial institutions and NBFCs offer both secured and unsecured advances for debt consolidation and to regulate your working capital.
You can avail a business loan from leading NBFCs like Bajaj Finserv that offers an attractive rate of interest against a substantial loan amount of up to Rs. 30 Lakh. Moreover, you can enjoy flexible tenor, online account access, instant approval, quick disbursal, collateral-free loans and other lucrative benefits.
You can also regulate your working capital by improving your business profits. Consider changing your business strategy to induce sales and pool in profits. Also, if you avail loans to regulate your working capital consider paying the EMIs on time to avoid debt and hefty penal charges.