Importance of Working Capital Management in India for Your Business

Practicing working capital management will help all aspects of your business to operate in tandem with each other so that they support each other. 

A working capital management involves monitoring cash flows to ensure the business meets its costs of operating, as well as fulfils its obligations to debt in the short term. 

Working capital could be temporary or permanent, depending on the nature of assets used. Permanent working capital is inclusive of the current assets that are central to the venture and its operations. Because these assets are fixed in nature, this working capital is also referred to as fixed, is stable and provides funds for daily operations. In sharp contrast temporary working capital is meant to meet seasonal requirements of the business, is variable in nature, and is prone to fluctuations. 

Sources of Working Capital – Temporary and Permanent

Common sources of working capital under the temporary category include – 

• Indigenous bankers, or private money lenders, might be a source of finance to your business using a loan.
• Trade Credit, is the credit given to businesses by the supplier of goods. If your business has a high credit score and confidence in your supplier, this is a viable option to secure short term finances for your business.
• Commercial banks provide loans, arrange cash credit, instalment credit, advances, account receivable credit and allow you to purchase and discount bills of exchange. 
• Advance payments are welcomed by some businesses from their middlemen and customers. This can be a short term source of working capital and is convenient in minimizing investment.
• Factoring/Account Receivable credit services may cause an increase in liquidity after availing of factoring services. These ensure that your payments from customers arrive on time through discounting customers’ invoices or bills. It also decreases risks involved with credit and enables the seller to focus more on the business.
• Accrued expenses are incurred expenses that have not yet been paid off, also serve as a liability to the business. These provide the business with some capital in the short run.
• Commercial Paper in form of unsecured promissory notes that are issued by banks and financial institutions to businesses and are the cheapest method of securing short term working capital.

Permanent working capital can be obtained from – 

Shares – The units of the capital of a company that are divided and have a fixed value are called shares. The sale of these shares to shareholders are a source of fund for the company. Shareholders buy or invest in shares to get dividends as a return on their investment.

Debentures – A document that is prepared by a company as proof of debt owed by a business is known as a debenture. This debt is without charging the assets of the company. This document is given to the loan creditors of the business, who are called debenture holders.

Public Deposits – Public deposits consist of funds collected from the general public in the company’s bank account.

Profits being ploughed back – Also known as retained earnings, this technique involves using some portion of the profit to reinvest in the business. It need not incur any cost to raise finance for the business using this method.

Working capital management is all about keeping track of the amount of money that comes in and goes out of the business on a daily basis. Entrepreneurs who are able to ensure smooth functioning of the organization and meet financial obligations are the ones who will have comprehended and realized how important it is to manage working capital. 

They can further use this knowledge to predict the financial flow of their venture going ahead. Sources of working capital, both temporary and permanent, add to the financial health of the organization.

A judicious entrepreneur strives to strike a balance between the two so that neither exceeds the prescribed limit.