All about Working Capital and its Management
Businesses can have multiple income sources and irrespective of the nature of these sources, their efficient management is critical to business continuity. Working capital is the sum of money needed for the day-to-day running of any business. A positive working capital forms the basis of a company’s future activities and secures its survival in the end. Thus, working capital management is quite crucial for small and medium business owners.
Working capital management is the continuous process of balancing a company’s current liabilities and current assets. In simpler words, working capital management is how an enterprise balances its income generation and expenses. It also involves managing cash flow, inventories, and accounts receivable and payable.
What is the Need for Efficient Working Capital Management?
Efficient working capital management can ensure that a company has a steady flow of funds to meet the present and upcoming expenses. This is crucial for sustainable business growth and catering to existing as well as potential customers. Monitoring working capital requirements gives business owners enough time to come with an effective solution to fill in monetary gaps. It can also help owners cut down on unnecessary business expenses and monetary thefts and can be considered as one of the best ways to increase productivity.
Working Capital Management Tips for SMBs:
A good working capital indicates that current assets are higher than current liabilities. As previously mentioned, this helps to combat financial complications and operational problems. When it comes to managing working capital, small businesses are not much different from business giants. Since small and medium businesses have smaller market footprints, they can enjoy the advantage of adopting a flexible and customized strategy. If you are wondering how to manage working capital, here are a few tips for you:
1. Ensure Steady Flow of Cash
It is essential to manage working capital with a well-planned budget in hand. To meet your budgetary requirements, you may collaborate with reliable funding sources and be ready with contingency backups. Once you find the most suitable lenders based on your needs, it is advisable to thoroughly check their track records so that they don’t let you down in the long run.
2. Take Advantage of Floating Capital
Floating capital is the difference between your book balance and bank balance. For example, if you have INR 3 lakhs cash in hand to cover dues that need to be settled by the 31st of the month, of which INR 1 lakh is supposed to be paid by the 10th of the month, then INR 2 lakhs is your floating capital. Instead of keeping this sum at hand, you may consider investing the same as a short-term deposit. Though the return can be less, it is better to get some return rather than getting none.
If you prefer investments, you can try investing in equities for the short term to generate some extra income.
3. Issue Timely Invoices
Issuing timely invoices and encouraging customers to make early payments may work wonders for a business. For example, you may offer a small discount to your customers if a bill is cleared earlier than the due date. This can reduce the time taken by customers to clear payments and can allow you to sell more in less time.
Similarly, instead of waiting until the very end of your payment cycle, invoicing your customer as soon as possible may help boost your cash inflow. In addition, having regular conversations with your customers closer to the invoice dates and sending reminders can help you to stay on top of account receivables.
4. Outsource for Debt Collection Process
Ensuring effective debt collection is necessary to manage cash flow in advance. It is therefore advisable to try to understand your customers’ billing preferences and procedures. Since debt collection can involve spending a significant amount of time and resources, outsourcing it may also serve as a great option.
5. Focus on Efficiency and Productivity
Focusing on efficiency and productivity helps ensure the timely completion of targets. This keeps your entire business process on track and may attract more customers. Meeting clients’ demands is one of the important factors affecting working capital. Thus, increase in productivity can help in improving working capital management.
6. Ensure Smart Inventory and Procurement Management
Working with fraudulent and unreliable third parties can prove to be counterproductive. Effective inventory and procurement management is one of the key ingredients to effective working capital management. Stocking up goods after strategic planning can help ensure a steady flow of products to your customers. Speedy deliveries can also help speed up your invoicing and payments.
7. Ensure Flexible Payment Options
Smooth working capital also depends on the goodwill of your creditors. However, when you have a million responsibilities at hand it is quite likely to miss timely payments. Late payments may lead to penalties being incurred and can make it difficult to source funding in the future. Thus, it is important to complete payments on time by exercising options like digitising monthly payments and scheduling electronic payments.
8. Be Prepared for Unforeseen Expenses
No matter how carefully budgets are planned, there can be several instances when your expenses exceed the set-limits. Besides, you can also be required to meet some last-minute expenses. Thus, it is always wise to keep aside a sum of money to be utilized in emergencies when you may need to cover for some unforeseen expenditure.
9. Do Not Mix Personal and Business Expenses
Though it is convenient to have a single bank account, avoiding using the same bank account for managing personal and business expenses is a recommended practice. Mixing up these expenses can help prevent you from understanding the financial health of your business. In addition to this, having a single account also increases transaction time and can make it difficult to determine the real cause of monetary fluctuations.
10. Incorporate Digital Tools Wherever You Can
Digitising business processes can significantly cut down expenses in the long term. Incorporating digital tools is also one of the best ways to ensure high-performance, efficiency, and accuracy of payments. Digital solutions enable easy monitoring and better planning thereby keeping in check that you always have positive working capital.
A serious approach towards working capital management can help make your business a profitable one. This, in combination with the right digital tools, can work wonders for your business.