Working Capital Management
Irrespective of your company’s size, investors are a critical source of finance for your business. Without the right investors, your business may not be able to grow to its fullest potential and in turn this will affect your profitability. But, investors look into many factors before funding your business. Working capital is one such criteria.
In a nutshell, working capital is the difference between the current liabilities and the current assets of a business. It is a liquidity metric that assesses the operational efficiency of a company. Working capital also helps ascertain your business’ ability to grow and pay its short-term financial obligations. Here are three reasons why investors check your working capital when assessing your company.
Working capital is a measure of short-term financial health
Adequate working capital means that your company has enough money to pay for its short-term financial requirements such as inventory, raw materials, repairs and maintenance, creditors, salaries, and more. It also means that your company is prompt in collecting debts and repaying its own, thereby not accumulating a hefty accounts payable. Investors consider such a business to be self-sustainable and cognizant of its finances.
Working capital indicates your business’ operational efficiency
A business has various processes like manufacturing, hiring, communications, sales, and others. These are interconnected and thus inefficiencies in one process can take a toll on all other cogs in the wheel. For instance, if you don’t have enough funds to procure inventory, you cannot initiate production and won’t have finished goods to sell. In turn, your sales target will not be realised and revenue won’t be generated. This also means that there will be a delay in paying your creditors, suppliers and staff. Given the inefficiencies, investors may rethink investing in your business. So, having ample working capital is extremely critical to securing the money you need.
Working capital shows your business’ potential to grow
When your company has a high working capital turnover ratio, it indicates that every rupee spent on working capital is generating good sales. This shows that your business is working like a well-oiled machine that has potential to grow from strength to strength. In turn, it serves as a green light for prospective investors who are evaluating your business.
Now that you know why investors look at your working capital when making an investment decision, ensure that your working capital isn’t negative. If you spot any signs of distress, avail a working capital loan to keep a cash crunch at bay.
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