Your business needs working capital to ensure that daily operations function smoothly. This cash also comes in handy when expanding your business or when you are faced with unexpected expenses. To ensure that you have funds to cater to these immediate needs, calculate your working capital in a methodical manner.
Here are some factors that you need to take into consideration when you are calculating the right working capital amount for your business.
The priorities of your business
Say you have a chocolate manufacturing business, and are launching a new line of chocolates. To do this, you need different ingredients as compared to your normal production. You also have to hire more machinery, and shift to a larger space in the coming months to ensure smooth operation.
Understanding your business’ growth and needs will help you chalk out the various payments that you have to make. This, in turn, will help you arrive at the ideal working capital amount, after taking into consideration fixed costs.
The operating cycle
Every business has an operating cycle. This cycle starts when you buy raw materials and ends when the final product is converted into sales revenue. The longer it takes for you to complete this cycle, the higher your working capital needs will be. Besides, if your operating cycle doesn’t run smoothly, you will encounter problems along the way. For example, you may find that if payments aren’t coming to you on time, you have to delay making payments to your vendors. This can disrupt your business’ productivity or result in your vendors reducing your payment window.
So, apart from understanding your operating cycle and estimating working capital accordingly, also identify potential problems and use funds from an external source if need be. The sooner you foresee these problems, the easier it will be for you to give your working capital a boost. Raise finance for your business’ working capital with a customised Working Capital Loan from Bajaj Finserv. This loan provides you a range of benefits like quick and easy approvals, fast disbursal of funds, and nominal interest without the need for collateral.
Additional Read: Everything you need to know about the life cycle of working capital
The size of your business
The size of your chocolate manufacturing business will also help you understand how much working capital you need. If you have just one premise that houses your office and factory, you will require less working capital. But, if you have several offices, a factory, and regional offices in other cities, you will need more working capital. This is because you will have to pay higher wages, many electricity bills, rent and maintenance of more than one facility.
The industry you operate in
The nature of your industry will also tell you how much you need to factor in for working capital. For example, if you are manufacturing chocolate, you will have to factor in the cost of cocoa butter and cost of extraction of cocoa seeds. You will also have to factor in the cost of dried fruit and nuts, which can be expensive.
You will also need a temperature-controlled facility to ensure that the chocolate doesn’t seize or spoil. Compare this with a cushion-manufacturing unit. You only have to consider the cost of procuring cotton and casing material, which is easily available and is affordable. So, if the processes associated with your business are unique and are expensive, increase your working capital accordingly. Keeping these factors in mind will help you arrive at the right working capital amount for your business. Keep track of any deficiency so that you can meet it with ease and continue business operations.
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