Importance Of Working Capital

Every business has both long-term and short-term financial requirements. The difference between the current assets and current liabilities is commonly referred to as working capital. Essentially, working capital is needed to meet the short-term financial requirements of a company and hence measures the efficiency of the business. Often companies fail to generate enough working capital despite making use of the best private equity fund. This happens because inexperienced management often gets too caught up in the long-term needs of the business, thereby ignoring the immediate needs. Read ahead to learn more about the importance of working capital:

1.    Day-to-day operations 

The inability to generate adequate working capital can be really hazardous for the reputation of the company. Working capital is needed to pay salaries, purchase raw materials, pay off current liabilities etc. Lack of cash can also temporarily halt the production activities. And while the short-term needs vary from industry to industry, they exist nonetheless. Even the best Indian real estate companies need cash for day-to-day needs.

2.    Enhances goodwill 

A business having sufficient working capital would be able to make timely payments to the short-term creditors. Organizations that pay their dues on time would always have a better goodwill than those which don’t. This is also one of the factors that impact the position of the company in the stock market.

3.    Easy to obtain future credit  

A company that has a good reputation, high solvency, and a worthy credit rating would not find it difficult to obtain loans from banks and other financial institutions in the future. This would ensure regular flow of funds into the company thereby aiding the efficiency of the business.
The working capital needs are as important as the long-term needs and hence should never occupy a backseat. Think about it!