working capital – Bada Business

8 Types of Working Capital & Everything you should know about them!

Wouldn`t it be easier to start and manage your business as an entrepreneur or a solopreneur had there been a problem-solving course on working capital management?

Wouldn`t it be wonderful to have a course that enables you to understand the concept of Working Capital Management in an easy-to-understand language? Fortunately, you can understand the basics of Working Capital Management and a lot more in this article.

What is Working Capital?

Considered as one of the most crucial components, working capital is vital for a smooth business operation. In simple words, it is the difference between the company`s current assets (cash, inventory, marketable securities, and receivables) and liabilities (rent, bills, and other expenses).

It represents a company`s operational activities and includes inventory, accounts receivable & payable, cash, and short-term debt.

How is it beneficial for a business?

Working capital is a vital factor for both business owners and financial professionals. An effective financial tool, the working capital gives an exact picture and a fair idea about a business` short-term financial standing. It also ensures the efficient use of all the components of current assets and liabilities to reduce the overall cost.

Types of Working Capital

Depending on the time, there are eight types of working capital in India:

Permanent Working Capital

Also known as fixed working capital, the permanent working capital consists of minimum current assets that are required to run the business operations smoothly. However, the size of the WC depends on production scale and growth.

Variable Working Capital

The amount that is invested in a business venture for a short period is considered as the variable working capital. In India, it is also used as temporary working capital and is used for changes in production and sales activities.

Reserve Margin Working Capital

As the name suggests, this type of WC is reserved by the organizations for unforeseen expenses to sustain during a crisis.

Seasonal Variable Working Capital

During the peak season of a business, a company requires more working capital to meet consumer demands. To fulfill the requirement the business owners opt for additional financial assistance which is known as seasonal working capital in India.

Regular Working Capital

This type of WC is typically required by every organization under normal circumstances to ensure smooth business operations.

Special Variable Working Capital

Special variable WC is the type of fund that is reserved by a business for its unique circumstances like the launch of new products, risk management, marketing campaigns, among others.

Gross Working Capital

This type of fund is invested under a firm`s current assets. Its major components include cash, short-term investments, inventory, marketable securities, and accounts receivables.

Net Working Capital

NWC is an essential type of working capital that represents the amount by which a firm`s current assets surpass its liabilities.

The concept of Working Capital is vast and is extremely vital for a business. Thus, the understanding of this concept requires deeper knowledge from the industry experts who have faced and resolved the challenges with their experience and in-depth understanding of the concept.

Take our Working Capital course that will clear all your doubts and provide solutions to your burning problems. To know more about this course and how it will benefit you, click here: https://www.badabusiness.com/psc?ref_code=ArticlesLeads

How to protect your Working Capital during Coronavirus Downturn?

Cash is King: How to manage Working Capital during Downturn

Working capital is the amount of capital needed to run a business and is calculated as Current Assets – Current Liabilities. Coronavirus lockdown has led to a drop in demand for goods and services. At a time like this business owners need to do an in-depth analysis of their cash requirements for efficient working capital management.

We get you 5 important steps for efficient working capital management during the Coronavirus downturn:

1. Operating Expenses Breakdown
There are 3 types of costs that you need to analyze:

Direct Costs- Costs that directly impact or are related to revenue.
Indirect Costs- Costs which are not directly related to the product or service but would be supporting costs to keep the business functioning. For e.g. marketing costs, office supplies, local travel etc.
Salary- Cost of employees working for the organization.

A proportionate cut down on indirect costs can help prevent the extra cash outflow. For e.g. spends on marketing can be put on hold or any IT related expansion can be deferred till the situation and revenue become better.

Cash conserving measures become the need of the hour

Important Lesson

Businesses need a positive working capital and cash flow to grow their companies. During a downturn they can still grow or remain afloat if they have access to enough working capital or have assets in cash or cash equivalents.

2. Inventory Management

Focus on reducing or finishing stocks.
During Coronavirus outbreak companies are getting stuck with large inventories as the customer is not buying the way he used to.
Instead of blocking your cash in procuring more inventories, try to reduce the number of times the product is stocked till it meets the consumers buying pattern and working capital management is not affected.

3. Look at working with multiple suppliers

During a downturn, businesses are sometimes not able to provide the product or service to the customer due to lack of adequate supply.
Look for additional suppliers so that you can source similar products.
Multiple suppliers will help in a price competition between the vendors and will help in bringing down your supply chain cost

4. Keep a lookout for alternate financing sources

During a downturn in the market, you can assume working capital requirements for your business will increase as customers will take longer to pay for goods and services.
Check the availability of your usual credit lines.
If you have a line of credit, consider taking the funds before and keep it in a separate account. In this case, this cash will be available if more working capital need arises.

5. Discontinue non-profitable Products and Services

Products that are sucking cash out of the business should be stopped immediately for reduction in working capital management.
Entrepreneurs can look at what products can be made using a ‘pull’ system which means avoid wastage in the production process, what can be produced on made-to-order basis and what should not be produced at all.

A lot of entrepreneurs only have their local chartered accountants taking care of accounts or they hire young account executives to do the same. This is to save cost. In times of a downturn, entrepreneurs must take consulting from finance experts that have seen similar situations in life and can help you make quick and efficient decisions.

In downturns, entrepreneurs must divide their working capital decisions in two parts:
1. Tactical
2. Strategic

Tactical decisions are the one’s that you will implement in the short term. That is, in the net 30 – 90 days.

Strategic decisions are the one’s that you will implement in their long term. That is, in the next 2-4 years.

Only those companies will survive the Coronavirus downturn and bounce back that understand working capital management. They need to keep a close account of how much cash is there within the company and how to use it judiciously.

To know more about how to manage working capital for your business, subscribe to the online problem-solving course on working capital management available in the Bada Business Mobile app.