How Important it is to Understand the Gross Working Capital?

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Gross working capital indicates a company’s total current assets, including inventory, securities, short-term investments, etc. 

It is used to gauge a company’s short-term financial health by calculating net working capital – determined after deducting total current liabilities from an organisation’s total working capital.

However, India’s MSME industry, despite being the backbone of the nation’s manufacturing prowess, faces a severe lack of working capital. 

Currently, India’s 42.50 million small and medium scale enterprises own a total of only Rs.1,470,000 crore worth of fixed assets, despite contributing to a total of 95% of the total industrial units of the nation.

  • India’s MSME sector currently faces a working capital deficit of almost Rs.16 lakh crore.

Experts have recognised a lack of adequate sources of working capital as one of the primary limiting factors of India’s small and medium scale industry. Moreover, poor working capital management has also been identified as a major issue.

  • Micro, small and medium scale enterprises provide employment to approximately 40% of the nation’s workforce, yet accounts for only 16% of all business sector lending.

To overcome such scenarios, businesses must have a clear understanding of different types of working capital, what they represent, and their importance. 

They should also learn how to manage working capital effectively so that they always maintain a positive balance over their current liabilities. 

Understanding gross working capital

As mentioned above, gross working capital consists of all current assets owned by an organisation. 

These usually refer to assets that are convertible to cash within a short time period, usually in a year or less. It is widely used for balance sheet analysis, as the total working capital points to a business’s current financial condition effectively.

Ideally, a business should always maintain a positive working capital (usually considered as a 2:1 ratio between current assets and current liabilities), meaning their total liabilities should not be greater than the total asset they own. 

An organisation with negative working capital, meaning they have more obligations compared to assets that they can liquidate, is likely to face financial issues and run the risk of going bankrupt.

Why gross working capital is important?

A clear understanding of gross working capital is essential for the growth of an organisation. It ensures smooth business operations by providing for everyday financial requirements.

Robust working capital also allows organisations to withstand unforeseen incidents, as they can procure more raw materials and workforce for emergency production requirements or pay for their everyday operations when demand is low. 

It also increases the solvency of a company and helps them obtain credits against favourable terms.

The Government of India has recognised the growing need for sufficient business capital. Along with several private and public sector lenders acting as sources of working capital, there are multiple government-funded initiatives as well which provide business loans to companies to help mitigate their financial crunch.

  • India’s total commercial lending stands at Rs.64 lakh crore (as of March 2019), of which approximate 24.9% or Rs.15.9 lakh crore is credited to micro small and medium scale enterprises.

Lenders, including Non-Banking Financial Companies like Bajaj Finserv, offer credit to eligible applicants at affordable interest rates and flexible repayment tenors. 

These loans are often used to mitigate emergency financial requirements, expand business operations, or to boost working capital. Simple eligibility criteria and easy online application process make these loans an ideal financial product for everyone.

Bajaj Finserv also provides pre-approved offers with such credits, further simplifying the application and documentation procedures.

Sources of working capital finance are necessary for small businesses, as they provide much needed financial support to best-run business operations. Every business owner should have a complete understanding to meet all their short term obligations and operating expenses.

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