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How to Calculate Working Capital Requirement for Your Business?

  • Highlights

  • Calculating working capital is key for business efficiency

  • Working capital is current assets less current liabilities

  • A negative net working capital implies stress liquidity

  • Fix negative working capital with a working capital loan

A business’ working capital indicates the short-term liquidity or its ability to meet its short-term expenses and thus signifies its operational efficiency. So, ensure that you make calculating working capital a priority. It will give you a true picture of your company’s liquidity standing and will highlight any areas that need attention.

Working capital calculation formula

While you can calculate working capital for your business in various ways, most companies prefer to express theirs as net working capital. Net working capital calculation comprises deducting the current liabilities of your business from its current assets.

Current assets are the liquid assets that can be converted into cash within one year. They include debtors or accounts receivable, expenses paid in advance (prepaid expenses), cash in hand, cash at bank, as well as unsold inventory, work-in-progress goods and raw materials. On the other hand, current liabilities are the day-to-day debts incurred by a business in its operation. These could be credit purchases made from vendors (accounts payable or creditors), expenses that are yet to be paid for (outstanding expenses), etc.

While making working capital calculation, the following adjustments need to be made:
- Deduct cash commitments from cash in hand: Buy back of shares, declared dividends, etc.
- Remove non-trade receivables from debtors: Loans to employees.
- Subtract old, wasted, and obsolete stock from the total inventory.

Working capital calculation: An illustration

Let’s assume that your business has the below list of current assets and liabilities:

Current Asset Amount (Rs.) Current Liability Amount (Rs.)
Debtors Rs.1,45,000 Creditors Rs.2,40,000
Unsold inventory Rs.30,000 Outstanding expenses Rs.25,000
Raw materials Rs.10,000
Obsolete stock Rs.4,000
Cash in hand Rs.20,000
Prepaid expenses Rs.1,000
TOTAL Rs.2,10,000 TOTAL Rs.2,65,000

Working capital = Current assets – current liabilities
Working capital = 2,10,000 – 2,65,000
So, your company’s working capital is = –Rs.55,000.

Working capital indications

Efficient working capital management will result in current assets exceeding current liabilities. Your business’ working capital ratio is considered to be healthy if it is within the range of 1.2 to 2.
- A positive net working capital signifies that your short-term business needs are being met.
- If your net working capital is nil, it means that your company has just enough money to pay for its short-term liabilities.
- A negative net working capital implies that the company requires further debts to meet its current debts.
For efficient working capital management, monitor your working capital ratio and ensure that you have a low collection period and inventory turnover ratio.

Next steps

If your business has a negative net working capital, it could hinder your daily operations and could lead to missed business opportunities. In such a case, you should finance the deficit and have a proper working capital management policy in place so that your business can operate smoothly without any delays or glitches.
- Revise working capital policy
A negative working capital can be managed in various ways. On the debit side, you can cut down on company expenses and ensure that your collection terms are tight and adhered to. On the credit front, you could check with your suppliers to extend the payment window.
- Fund the deficit with a Working Capital Loan
To give your operating capital an immediate boost, you could consider a working capital loan. A Bajaj Finserv Working Capital Loan will allow you to quickly bridge any liquidity gaps as it offers funds up to Rs.30 lakh with approval in just 24 hours.

This means that you can tackle the situation at the earliest, preventing further damage to your enterprise’s operations. You could avail this loan in a flexi format so that you can borrow as and when there’s a deficit and prepay when you receive money from debtors. Here, you pay interest only on the sum used and not the whole amount. You also get an option to pay only interest as EMIs, thereby easing a liquidity crunch even further. This unique facility makes these loans best-suited for managing unplanned working capital or cash flow needs.

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