How Does Working Capital Requirement Impact a Firm’s Profitability?

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Working Capital or WC is the quantitative measurement of available current assets to meet current liabilities. You can arrive at the net WC of your business by deducting current liabilities from the gross WC.

Your business is meeting the working capital requirement with healthy liquidity if the quantity or amount arrived at is in positive.

However, if it is in negative, that means your business is struggling to meet its requirements. If your business’ P&L Statement shows a regular deficit, it means your firm requires fresh capital. Taking loans is a good option for meeting the shortage and regulating a smooth cash flow.

Non-banking financial institutions like Bajaj Finserv offer Business Loan to help you with fresh capital infusion in your company. You can also avail this loan to meet any expansion plans or introduce new technologies.

A fresh capital can wipe out any existing deficit on your statements and give your business a push towards growth.

Bajaj Finserv also offers customised Business Loans for various business needs like a working capital loan, Machinery Loan, SME and MSME Loan, and Business Loans for Women among others. You can avail any of the above according to your suitability.

Working Capital Reqirement
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However, when it is about the working capital requirement, the loan amount will depend upon how much cash your business needs.

The requirement is dependent on your business’s cash conversion cycles. Cash conversion cycle is the time between raw material purchase and revenue generation.

You may think a short period is beneficial for the company and that early revenue means more profit. But, it is not always the case. For firms in different industries, the cycle length has different impacts on the profitability.

The cycle also determines the required amount of working capital to meet the necessities of the in-between period. You need some liquid assets for meeting the gap of cash conversion cycle. It is the current capital requirement of your firm.

Now, the current capital policy your business follows is a significant factor in deciding whether you get high profits or not.

Impact of WC requirement on firm’s profitability:

Here are some elements of current capital with a description of how they impact a firm’s profitability.

  • Inventory value

Inventories of raw material or finished goods stacked in high value will block the capital. It will make lesser revenue available for profit generation. Thus, it will impact the profitability.

  • Payables and receivables cycle

A prolonged bill payable and receivable cycle again blocks the cash flow, whereas a short period allows its smooth flow.

  • Percentage of liquid cash

Working capital is the regular investment required to maintain consistent cash flow. A business’ policy towards liquid cash maintenance impacts the revenue available for profit calculation.

  • Policies regarding outstanding and prepaid expenses

These are current assets and liabilities. You may keep your business policy of holding cash for long before making payments with the hope that it will strengthen cash flow. But, good cash flow does not always mean a good current capital.

The more your outstanding liabilities are, the lesser percentage of revenue will be available for profit. It is also advisable to keep prepaid expenses low, as a lot of cash is trapped there.

Thus, you can see how working capital requirement policies impact the profitability of a firm.

You may devise a plan to keep optimum amount invested in WC. It will help your business stay agile.

However, it is also good to infuse fresh funds instead of struggling with existing finances to make ends meet. You may avail a loan from lending institutions like Bajaj Finserv for filling up this gap.

Bajaj Finserv provides pre-approved offers on various advances like a business loan, personal loan, home loan, EMI product financing, and other financial services.

This offer makes the process of availing loans easy and quick. You can instantly check your pre-approved offer online. Simply furnish a few details like name and contact number to check it.

Also, before applying for a loan by availing this pre-approved offer, make sure you are ready with the following documents.

  • Passport size photograph
  • KYC documents
  • Business proof like incorporation certificate, partnership agreement, etc.
  • Relevant financial documents
  • Bank account statement of last month

With the documents ready, apply online and avail the loan with ease to ensure smooth cash flow in your business.