28062023 Editorials STARTUPJARGONS08:
- How do you define Working Capital
- What is well utilized Working Capital
- How does controlling Working Capital benefit
- What are the benefits achieved by being austere
- How do you procure Working Capital
‘Working Capital refers to the difference between a company’s current assets and current liabilities. It represents the funds available for day-to-day operations and short-term obligations.
Well-utilized working capital helps a business meet its operational needs, such as paying suppliers, managing inventory, covering overhead costs, ensuring smooth operations and avoiding disruptions.
Controlling working capital through efficient management of inventory accounts receivable, and accounts payable improves cash flow, reduces financing costs, and increases profitability. Being austere and prudent in managing working capital leads to reduced expenses, minimized debt, improved liquidity, and enhanced financial stability.
STARTUPs can procure working capital through various sources such as bank loans, lines of credit, trade credit, Friends and Family or retained earnings.’
‘In a nutshell, Working capital refers to the capital or funds that a company requires to fund its day-to-day operations and meet its short-term financial obligations. For a STARTUP, working capital is crucial as it ensures the smooth functioning of the business and helps sustain its operations until it generates sufficient cash flow to cover expenses.
Working capital is calculated by subtracting current liabilities from current assets. Current assets include cash, accounts receivable, inventory, and other assets that are expected to be converted into cash within one year. Current liabilities include accounts payable, short-term debt, and other obligations due within one year.
STARTUPs typically have several expenses to cover, such as rent, employee salaries, marketing costs, and purchasing inventory or raw materials. Working capital is needed to pay for these expenses until the STARTUP starts generating revenue and positive cash flow.
It’s important for STARTUPs to manage their working capital effectively to avoid cash flow issues and potential business disruptions. Insufficient working capital can lead to difficulties in paying bills, delays in fulfilling orders, and strained relationships with suppliers. On the other hand, excessive working capital can indicate poor utilization of funds and missed investment opportunities.
STARTUPS often need to carefully monitor their working capital and consider factors such as sales cycles, payment terms with customers, inventory turnover, and vendor payment schedules. By doing so, they can maintain a healthy working capital position that supports their ongoing operations and growth.’
‘For all those who are interested to know in detail about the financial terms used by your auditors, we decided to start a series on financial terminology education. OMG! That sounds a little complicated, let us simplify that as a series on STARTUP Jargon.
In this series, we shall give a rough meaning of the various words used in this area and ways to better the situation. However, we request each of you consult your financial advisors before deciding your strategy.
Every setup has its own methodology of growth and no two organizations are similar. Ultimately it is every founder’s dream to turn into unicorns and the ecosystem wants to see more such enthusiastic achievers. So wishing you all the very best in your endeavour hope our today’s topic on Working Capital, has cleared your perplexity, at least to some extent, on the subject.’
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