About Working Capital.

About Working Capital - Money Matters.

This post is about working capital. Working capital is needed to start a business and to run it. A businessman will need money at every stage of his business. Every business, no matter how small it may be, will require money for its operations. The money used for starting and maintaining a business is called working capital.

Why Working Capital is Required?

Businesses are born out of money. There is no business without money. Money is required to form a business and is needed in every phase of its growth and progress. Businesses can't grow if they are not funded adequately.

When a person decides to start his own business, he has to overcome many kinds of problems. The most challenging problem is that of getting money for business. Most problems solve automatically with adequate supply of money. In business, money solves problems.

Difficulties in Procuring Funds.

Getting funds is a challenge for businessmen. This is because they have to prove their repaying capabilities to the lender which becomes difficult if their business is new. Banks and financial institutions won't lend until they are convinced about the borrowers credentials.

Getting money from friends and relatives are also not feasible because they might be giving money from their savings which again has risks. When individuals who lend, demand money on short notice, things get bitter.

Why Savings Should not be Used.

Using money from savings is not a good idea because business needs a lot of money and that too frequently. Savings cannot supply money the way it is required in business. A businessman should not utilise his savings for business because it is risky. Savings drains up quickly when used as working capital. Even if he has the money to invest in business, it is still advisable not to put his savings at risk. So, the option is to look for alternate source of working capital.

Sources of Working Capital.

Funds in business are often sourced from outside. Working capital is often collected through borrowing. Banks are the best source for money as they are established lenders. Small businesses can rely on banks for their financial needs as they are reliable. NBFC's too can be considered for borrowing because they are next to banks in lending.

There are many ways through which working capital could be sourced, but all may not be reliable. When a businessman seeks working capital, he may get it only against a collateral and this is a bit risky. There is always a risk in borrowing and the risk manifests when the borrower couldn't repay his debts. Risk increases if the lender is not genuine. Therefore, it is imperative to find genuine source for funds.

Options for Small Businessmen.

People who want to start their own business have more options today than ever before. Nationalised banks in India offer business loans at a reasonable rate of interest and they are reliable. Public sector banks such as State Bank of India have a reputation of being the largest lender. Private banks too are good in lending, but their interest rate may be higher.

The Pradhan Mantri MUDRA Yojana (PMMY) is a scheme to help people who want to start their own business. Under this scheme an individual could get loan upto Rupees Ten Lakhs (1 million).

Management of Working Capital.

Working capital has to be utilized carefully. It should be used for the intended purpose only. Planning is needed to setup a business and to develop it. Money should never be wasted for unplanned tasks.

The following points may help a businessman to manage his working capital.

(1) Make a business plan: Make a thorough business plan. A business is not a short time activity. The reason why people choose to do business is because it creates a legacy of ownership and belonging for the individual in his quest for making a living. A business is like a child which needs to be cared and brought up and planning has a major role in it. Without proper planning, a businessman may not be able to prioritize essential purposes and utilize funds accordingly which eventually leads to wastage of funds.

(2) Borrow money from trusted source: Borrow money only from a trusted source and always plan before borrowing. Plan about the amount of money needed and how that money will be utilized in business. Before borrowing, enquire about the rate of interest from the lender along with other applicable charges and their terms and conditions.

(3) Start from a small one: If your business is new, start from a small or low profile. Don't be in a hurry to make it big. Don't waste money on unnecessary things like fancy decorations, expensive advertisements or building up huge stocks as these could prove counter productive. Businesses should develop gradually but consistently.

(4) Fund business correctly: Put money into business at the right time and for the right purpose. As funds get depleted very quickly and the next source for funds may not be immediately available, it is always prudent to save working capital as much as we can in order to avoid financial crunch.

(5) Limit personal expenditures: If you have a business loan, limit your personal expenditures. Don't spend too much from your savings or through credit cards because every additional expense increases your debt burden.

(6) Check your balances in bank: Check your financial health frequently. Check your bank balances, the credit card statements, the loan EMI's and so on and remain updated about them.

(7) Avoid giving goods or services on credit: Avoid giving services or products on credit to customers because this practice can ruin your business. Some businessmen do this in order to get new customers or to retain existing customers and suffer later on.

(8) Do not lend working capital: Do not lend working capital to anybody. Money is volatile and never stays with anybody which is why lending is risky. If you lend money to somebody, you may not get it back when you need it. This does not mean that you shouldn't help anybody financially, but be more careful using funds for business.

A new business will take time to setup. There is no easy way to make money in business. A businessman has to put money into his business to make money out of it. Business strain is felt initially when there is no income or revenue. Every businessman faces this condition at some point when he starts his business. The best way to avoid business strain is by starting with less money and increasing investments gradually as business progresses.

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The previous post was about "Our Budget".

The next post is about Diversifying Savings.

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