All small-scale businesses, large enterprises, and corporations function on a set of standard business procedures, terms, and conditions.
No matter the size of the business, it is essential to equip oneself with some critical operating procedures and the requisite knowledge to determine how to drive business growth.
For instance, a company running into financial distress may need to look at its net working capital and assess its liquidity position.
Companies can gauge their stability and growth prospects with a few vital business terms in mind.
When you are your own business analyst, you will know when to recommend some strategic changes, implement major financial decisions, and establish a stable working procedure.
So, take a look at a few essential terms that can help estimate your business’s position to chalk out a well-defined strategy.
Essential business terms you should know
Businesses often have accrued financial obligations to creditors and suppliers. The term ‘accounts payable’ represents these obligations and has a crucial contribution to the net working capital.
Based on the credit terms of businesses, these may be either long term or short term. The management of accounts payable allows you to gauge the operating liquidity of your company.
Accruals basis of accounting
The most commonly-used approach to record financial transactions, the accrual basis is a method of recording incomes and expenses as and when they accrue and not on actual receipt or payment of cash.
Payroll taxes, wages payable and future employee benefits are some items that feature among a company’s accruals. Although not necessarily involving cash, they impact a business’s net income.
Working capital is a direct measure of a company’s financial status and its liquidity. It is also commonly referred to as net working capital. It is the difference between a business’s current assets such as inventories of raw material, finished goods, cash, accounts receivable, etc. and its current liabilities like accounts payable, short-term loans and advances, etc.
In many cases, a company’s net working capital can be calculated as a direct sum of the company’s cash, inventories and accounts receivables and any other accruals.
The working capital is a clear indication of a business’s financial health, its operational efficiency and liquidity.
It is thus crucial to know how much working capital your business needs at all times beforehand to avoid situations of immediate financial distress.
Short-term business finance
As working capital is a crucial aspect, the means to finance it is equally important. If a company or business does not possess sufficient net working capital in hand for necessary liquidity, it may secure short term business funding like a working capital loan for the same.
As working capital loans are one of the easily-obtainable business loans, they can sufficiently make up for initial financing shortages due to revenue reduction or improper liquidity management.
As a business owner, you must, however, be clear on why you should choose a working capital loan to fund your business operations.
Several lenders provide such business loans to make short-term financing convenient for companies, including Bajaj Finserv.
The lender also makes financing hassle-free and time-saving with its pre-approved offers. You can avail them on several financial products, including business loans and personal loans. Provide only a few essential details online to check your pre-approved offer.
Working capital turnover ratio
A critical parameter for financial analysis, the ratio defines a business’s efficiency in working capital management.
A company’s working capital turnover ratio can be calculated by dividing its net annual sales by the amount of working capital in that one year.
In this case, the working capital totals all current assets minus the current liabilities instead of a sum-up of the former.
Whether you are an amateur entrepreneur or the owner of an already established one, knowledge of these critical business terms will always come in handy.
Make sure to learn about other business intricacies as well for in-depth analysis and thought-out strategy formulations to drive business growth.