(This article was first published on Razorpay Learn.)
Working capital is essentially the money that a business uses to manage its day-to-day operations. Working capital is typically available to a company through the sales it makes every day, which is then utilised to pay bills, cover routine expenses, manage inventory, etc.
In the growth phase, businesses also fund their working capital requirements with short-term loans and advances.
In financial terms, working capital is defined as the difference between a business’s current assets and current liabilities. A positive working capital, which means that the business has fewer liabilities as compared to assets, is a sign of a healthy business. Negative working capital means that the business needs to manage its working capital more efficiently.
Of course, during these uncertain times, in the middle of a pandemic, it has been difficult for small businesses to keep their wheels running smoothly. According to industry reports, a majority of MSMEs have struggled to manage their working capital efficiently.
Working capital has to not only be managed efficiently but used effectively as well. More so for online businesses. Effective use of working capital can help online businesses grow and broaden their customer base.
Here are 5 ways to use working capital loans to grow your online business.
Run marketing campaigns
A positive side effect of the pandemic has been the rising adoption of online shopping. Consumers are wary of stepping out of their homes to make purchases. They prefer to buy using apps and websites, which is great news for an online business. Your customers are already where you are – on the internet.
But so are your competitors. The online marketplace is as crowded as the offline one. Reaching your potential customers organically can take time, which is why you can grab eyeballs by running online ads. These ads can be on search engines or social media platforms.
To begin with, you won’t require a big budget to run these ads. Hence, you can use some part of your working capital to quickly get the ball rolling.
[Recommended read: How to Boost Online Sales Using Google Shopping Ads]
Stock up on inventory
A lot of brands fail because they promise but don’t deliver. Let’s say you run an ad and bring a prospective customer to your website. The customer spends time looking at your products and selects the one she likes. But after adding the product to her cart, she is informed that the product is out of stock.
This is the kind of bad customer experience that you don’t want to provide. Bad experiences are bad news for brands, even the ones with great products.
Make sure you have enough inventory to fulfil the orders you receive. You can prioritise your inventory on the basis of sales trends. Working capital can be used to stock up on products that are sold the most. This will also ensure that the inflow of money will be in line with the outflow.
Pay back your dues
Creditworthiness is very important for small businesses. Small businesses often require loans for various types of business operations. Banks and other financial institutions give out loans only to businesses that have a good credit score.
And to maintain a good credit score, a business needs to pay back its dues on time. This is where working capital can come in more than handy.
You can use your working capital to pay any instalments or EMIs that you might have for business purposes. Making sure that you don’t miss any due dates for such payments will ensure that you are able to get a loan easily at a later date as well.
[Recommended read: How Businesses Can Maintain a Good Credit Score]
Hire professionals for projects
A small business might not always be able to afford to pay salaries to specialized professionals. Even if the business can afford to, it might not have enough work on a recurring basis to hire a full-time professional.
Hence, employing a professional or consultant on a freelance or contractual basis would make sense. Such professionals could be CAs, designers, software developers, content writers, social media marketers, etc.
You can use your working capital to employ such professionals for specific, time-based projects. No need to hire them as full-time employees and pay them a monthly salary.A business can use working capital to hire professionals or consultants for specific, time-based projects.CLICK TO TWEET
Stay ready for sudden expenses
Some of the rules that apply to our personal finances are also relevant to business finance. One such rule is the importance of having an emergency fund. A business has to be prepared for a rainy day.
It is not uncommon for a business to be suddenly faced with unforeseen expenses. There are numerous socio-economic and political factors that can cause a business to suddenly need money.
One way of handling such expenses is by taking Cash Advance from Razorpay – it is an additional source of cash that you can withdraw instantly when you need. Of course, dipping into your working capital is also the easiest way to meet these expenses. You can use it for medical emergencies, quick repairs, unplanned inventory, etc.
These are some of the ways that a business can use working capital to effectively keep operations running. But at the same time, getting working capital loans is not easy for MSMEs. With Razorpay, the process becomes easier and quicker.
Razorpay Capital solves your cash flow challenges through short-term working capital loans. Find out more by clicking on the link below.