What is working capital management?

Last Updated: 14 Oct 2024

Working capital is the capital that a business needs for its daily operations. There is a time period involved during which a business converts its raw materials into output and the output is sold to customers for generating cash. In this time period, the business needs capital to fund its operations. Working capital management is the management of your working capital needs in an efficient way so that your business remains solvent while doing its daily operations.

Gross and Net Working capital

Gross working capital is made up of the current assets of the company. Current assets of the company are assets that can be converted into cash within a period of one year or less. These assets include cash, inventory, accounts receivable etc. Net working capital is the difference between current assets and current liabilities. Current liabilities are liabilities that will come up for payment within a period of 1 year or less. These include accounts payable, short-term loans etc.

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Working capital loan

Negative working capital means that your business has more current liabilities than current assets. In order to fund this difference, you will have to take a working capital loan. This loan will enable you to fully pay back the current liabilities of your business. If your business is unable to pay back fully its current liabilities, then it will be rendered bankrupt.

Working capital loans are short term loans. They have to be paid within a period of 1 year or less. They are usually approved quickly. If you have current account with a lender, the lender gives you the working capital loan on your current account, in the form of overdraft facility. The lender may ask for a security to give you a working capital loan. If the credit score and cash flows of your business are sound, then the lender may give you an unsecured working capital loan at a reasonable rate of interest.

You can also raise other types of loans, such as a gold loan from IIFL Finance, to meet the working capital needs of your business. You just need to put gold or gold jewelry as collateral, and you will get the loan. You can then use the loan amount for meeting the working capital needs of your business. The interest that you will have to pay on this gold loan may be lower than the interest on working capital loans that you take from banks etc. Once you pay back the loan you will get your gold jewelry back.