How to Determine The Working Capital Needs

There is always a tug of war between the assets and liabilities of a company. Working capital is the quantity by which the former exceeds the latter. It is crucial to know about the financial health of your company to take profitable business decisions.Given below are five vital factors that you should keep in mind while analysing your working capital requirements:

1. Know About the Size Of Business and Sales: Greater the scale of operations of a business, larger the requisites of the working capital.
2. Map the Length Of The Operating Cycle: Study how the cash is getting converted. That is, how the semi-processed equipment, raw materials, finished products, borrowers, statements and sales are transforming from cash—more the length of the operating cycle, larger the necessity of working capital.
3. Understand the Business Character: Each business is different companies with unique characters. Comparing the values of current and total assets of your venture can give you a clear picture of how to allocate resources in an orderly manner.
4. Mind the Seasonal Variations: Businesses that are impacted by the seasonal changes might have extra working capital needs. For instance, stocking up of supplies that are not available throughout the year is essential for such businesses which need to account for an extra buffer in the working capital.
5. Prepare for Highs and Lows: If the demand and supply of your products are susceptible to high fluctuations, a contingency plan can help to buffer any unforeseen emergency that might arise in its course. Thus, a reserve working capital, which is a permanent amount, preserved in excess of the regular working capital, can come handy in such instances.

Businesses must conduct evidence-based research on which factor renders what changes to the working capital to ensure that it flourishes and you can keep major losses at bay.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.