Are you having a hard time managing your financial affairs?
Well, you’re not alone!
Lack of cash is probably the biggest cause for businesses to fail, or not reach their full potential and get lost amidst the crowded competition.
Better known as Working Capital in the line of business, it’s how you manage the cost of day-to-day functions without selling your company’s resources and assets.
What is Working Capital?
In technical terms, it’s the leftover amount upon meeting your current financial obligations.
More broadly, it’s the available cash on your hand, including loans, accounts receivables, short-term investments, interests, and returns minus accounts payables, additional expenses, and any outstanding bills or unsettled debts.
Importance of Working Capital
The role of working capital is expansive as it goes deep into the very foundation of running a business. So much so that not a single area can last for long without a proper incoming cash flow.
That is, from production to marketing, sales to service, research to development, and employees to legal norms, everything depends on your working capital.
As precious as it is though, money is always hard to come by.
Challenges of Working Capital (as per Small Businesses)
- Operational expenses (40%).
- Credit unavailability (31%).
- Debt repayment (27%).
- Lack of working capital for necessary inventory or supplies (17%).
And that’s not all! Insufficient funds can also result in the cancellation of investments and a reduction in employee wages or even the workforce itself.
In fact, about 32% of small businesses resort to cutting staff, and hours, or downsizing their operations altogether to organize their working capital.
Whereas, 69% of employers use their personal funds to meet their firm’s financial liabilities with 45% applying for additional credit.
Now that you know the key challenges of maintaining a proper cash flow, let’s turn our attention to some of the actions that you can take to address them.
Tips to Manage your Working Capital
- Manage your inventory to cut additional costs
Inventory, stock, and supplies can take a significant portion of your working capital. While overstocking can block the capital for immediate use, out-of-stock inventory can cause you to miss profitable deals and sales opportunities.
So instead of hoarding too much inventory or not having enough, what you can do is monitor it closely and re-order items only when the stock hits the ground.
Better known as JIT (Just in time) inventory management, it’s how you cut the cost of storing excess inventory when it’s not needed.
- Borrow a Business Working Capital
With the majority of small businesses (55%) relying on loans or lines of credit for external financial support, getting a small business working capital is a perfect way of raising funds.
There are many forms of business loans that you can avail like equipment financing, SBA loans, and other types of fast business working capital depending upon your financial requirements i.e. short-term or long-term.
You can also use your business credit card or partner with a fintech company, or angel investor to get the credit.
Just don’t forget to pay them back on time so as to maintain a credit-worthy record for loan eligibility in the future.
- Pay on time to avoid extra charges
Timely payments to vendors, suppliers, and third parties can help you a great deal in maintaining the cash flow, order instantly, get better quality and discounts, as well as build long-lasting relationships with your partners.
At the same time, helps you generate goodwill and a reputation that will last for a lifetime. All the while opening several doors for you at the time of a financial crisis.
Automation is also a great way of streamlining vendor-related processes such as invoicing, communication, and payment management so as to file your ITC claims and GST returns on time.
- Maintain a balance between your Debtors and Creditors
Along with clearing your debts on time, you should also be able to collect your payments within a set window.
A proper balance between your debtors and collectors will ensure a smooth cash flow at all times.
Although providing affordable payment options such as Buy Now, and Pay Later will certainly boost your sales and revenue, what’s more important is, to collect your payments as soon as you can.
Employing a collection agency or using a payment gateway for online payments are both quite effective in keeping your sales to cash cycles as short as possible to improve your working capital.
- Unlock cash using data analysis and digital technologies
And finally, it’s your accounts data that you can analyze and gain meaningful insights into your business performance or KPIs and improve your net working capital.
You should also implement technologies such as web analytics, artificial intelligence, and automation to take your working capital strategy to optimum levels.
Just follow these steps to digitally enhance your working capital:
Step 1: Build your database.
Step 2: Incorporate advanced analytics.
Step 3: Improve your business performance.
Step 4: Work on Innovation opportunities.
And unlock all the cash you need.
