Working capital of a business is the difference between its current assets and its current liabilities. It shows whether a business has sufficient cash flow to cover its debts or expenses.
The important factors concerning the management of working capital are – cash management and inventory management.
Extra capital may be required to service high-volume orders or expansion of business operations.
Businesses may face problems in their cash flow during lean seasons. Under such circumstances, the company can take a working capital loan.
Also, immediate funding may be needed in case of emergencies. A company may have to meet obligations due towards suppliers or employees, even though payments are due from its customers.
Plus, business improvement requires increased working capital. For instance, a company may be able to avail the benefit of discounts provided by suppliers by making bulk purchases. The business will necessarily have to bear a greater cost to make such purchases.
Different expenses such as payment of temporary employees, or other expenditure not having budgetary allocation will need sufficient working capital as well.
A business needs to maintain a balance of working capital. While an excess of working capital means that suitable investment of cash has not been undertaken, a lower level will disrupt business operations.
Companies can, however, avail a business loan to ensure sufficiency of the working capital in the case of shortages.