2020 saw an unprecedented challenge for businesses to manage their working capital. With normal cash flow disrupted, the average working capital cycle for companies escalated as they were unable to make payments. In addition, the reduced demand for goods saw inventory build-up for non-essential products, and companies struggled to adjust their production levels to changing demands.
Even the top 500 companies listed on the BSE increased their payables by 69% to deal with such adverse effects.
Increasing working capital management allows companies to reduce their reliance on external funding and adapt to changing market situations. Today more than ever, business owners must understand what is working capital management and how to get better at it.
Tips to increase working capital management
Working capital management is an essential part of running a business and involves monitoring assets and liabilities to maintain sufficient cash flow and meet all operating costs and debt obligations. Effective working capital management makes sure that a business always has enough resources for everyday operations while keeping extra resources invested for productivity.
Now that you have learnt what is working capital management, here are some useful tips to increase it.
Tip 1: Set and measure target performance metrics
Competitive businesses measure working capital KPIs (Key Performance Indicators) quarterly or monthly, assess their competitors and set targets for improvement. The most important of these KPIs include debt to equity ratios, accounts receivable turnover and operating cash flow. Choose the appropriate metrics based on industry sectors but always monitor working capital ratio and cash conversion cycles every month.
Tip 2: Improve the receivables process
Businesses need to have a good collection system in place to shorten the receivables period. A successful business will deliver its invoices without delays and have efficient invoicing processes to send timely invoices to debtors. Inefficiencies can cause lost invoices, large backlogs and the need to manually process the invoices, which will incur unwanted expenses. Companies need to reassess their invoicing process, set up electronic invoicing systems and speed up the billing and collection cycle.
Tip 3: Managing the inventory system
A well-managed inventory system is often the best way to improve working capital. An excessive stock puts a huge burden on cash resources, while insufficient stock results in lost sales. For effective inventory management, one needs to monitor items being produced, put in warehouses and sold.
Businesses can get a higher net working capital by avoiding excessive stockpiling and reducing the stocks of slow-moving inventory. Business owners should know how to convert slow-moving and excess inventory into cash should they need to.
Tip 4: Paying the vendors on time
Establishing a good working relationship with vendors can go a long way for all businesses. Companies that pay their dues in time always develop a strong financial relationship with their vendors and earn their trust. When your business faces a downturn or a cash flow crunch, you are more likely to earn some leniency.
Companies that follow strict payment disciple are in a strong position to get better deals, discounts and payment terms. It saves money in the long run and helps to establish a positive reputation among suppliers and distributors.
Tip 5: Making arrangements for adequate financing
After analysing the KPIs for working capital needs, one needs to carefully pick the right financing solution with adequate fund sizes for unexpected demands. Short-term business loans with the Flexi loan facility allow a company to draw funds as per requirements and pay interest on only the funds withdraws.
In addition to business loans, one can also get long-term secured loans to stabilise healthy cash flow. You can use this cash flow to pay suppliers, fulfil existing orders and increase cash returns on investments.
For better cash flow, look for financing solutions from NBFCs like Bajaj Finserv. They offer unsecured business credits with a hassle-free approval process.
The financial institution also extends pre-approved offers to simplify the loan application process. These offers are applicable on various financial products like business loans, personal loans, etc. You can check your pre-approved offer by providing a few essential details.
Other factors to look into to ensure efficient working capital management
To make sure it has enough resources, a company needs to balance its cash, inventory, short-term financing, trade payables and receivables. Thus, businesses should monitor all types of working capital, including gross, net, temporary, permanent, reserve, variable and seasonal working capital.
A company’s inventory should be enough to deal with small, unexpected needs but not so large that it wastes resources. To do this, you need to know how much working capital your business needs. You will also need to carefully manage the working capital to improve profits and maintain operations even in harsh markets.