Working capital is an integral component of every business. Irrespective of its scale of operation and size, it is compulsory for business owners to maintain and manage working capital at all times. To achieve the same, they must create effective working capital management strategies and implement them in their everyday operations.
1) What is Working Capital Management?
2) Objectives Of Working Capital Management
3) Working Capital Management Strategies
In simple words, working capital management is the practice of managing a company’s current assets and liabilities. Typically, working capital serves as an efficient tool for determining a company’s current financial standing. It further helps to analyse whether a company is able to meet its immediate debts.
An efficient working capital management helps businesses enhance their financial health and boost overall profitability.
Typically, the primary goals of managing working capital are to –
Regardless, in case of shortage of working capital, business owners have an option to seek funding without applying for a business loan. They can raise funds with the help of KredX’s invoice discounting services and meet their business requirements quickly.
We extend funds within 24 to 72 hours* against simple criteria and with attractive terms of repayment. This helps businesses to access funds as and when required.
Business owners must manage their working capital actively as it determines the long-term financial standing of their firm. With the help of active management of working capital, business owners can generate higher returns on capital and improve the business’s liquidity significantly.
Improper cash management often leads to negative working capital, when a company’s accounts payable exceed its accounts receivable. It also directly hampers a business’s ability to optimise its operational activities to the fullest. It is because they require a continuous cash flow to purchase raw materials, meet sudden expenses and other overhead costs.
Business owners can manage their company’s working capital by creating suitable strategies and plan of action. Notably, such strategies must be aligned with factors that affect the company’s working capital.
This table below highlights the factors that influence a firm’s working capital.
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Endogenous Factors |
Exogenous Factors |
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Company’s size |
Type of industry |
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Organisational structure |
Conditions of macroeconomics |
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Company’s growth rate |
Availability of funding options and accompanying charges |
|
Cash flow strategy |
New technologies and products |
|
Borrowing and investing capacity |
Competitors |
Effective management of working capital includes managing accounts receivables and account payables. It also depends on active inventory management.
One can easily manage their firm’s working capital with the help of these strategies –
Paying off suppliers on time helps businesses to secure favourable terms of negotiations and services. It also helps inculcate a better working relationship with suppliers, which often proves useful in securing better deals.
A business should evaluate its stock frequently. It will help to avoid a situation where excess cash is locked in the firm’s inventory. Regardless, they must maintain a balanced inventory composition so that they can access stock easily to meet immediate orders.
Keeping a close tab on expenses proves useful in more than one way. It helps to maintain positive working capital . Also, it facilitates better cost management and allows businesses to avoid unwanted expenditures and in turn, bring down operational expenses.
In certain situations, zero working capital business may consider availing a loan. Typically, such a situation occurs when a firm’s current assets and current liabilities are equal. Since a firm requires working capital to operate, it can access money through a loan.
Notably, most business loans come with strict eligibility criteria and require applicants to meet specific requirements to access funds. Also, firms with a negative working capital may choose this strategy to keep their operations afloat.
Applying for Tax-deferrals can help businesses to have tax-free growth. Besides, reassessing contracts and credit terms with debtors can ensure a stable working capital cycle at the right time. Businesses need to keep in mind that they cannot provide an extended repayment window, as it can impact their cash flow growth. CFOs should re-evaluate their credit terms to ensure that the offering to their debtors is relevant to the company’s cash flow requirements. This will lead to better management of credit control systems and preventing late-payment or defaulters.
When it comes to the payment process, timely repayment is considered a crucial aspect for businesses. A proper repayment plan can improve payables performance and reduce DPO (days payable outstanding) in businesses.
In the post-pandemic scenario, extension in DPO can result in a reflection of liquidity issues and also brings a negative Cash Conversion Cycle (CCC). Therefore, companies need to develop strong supplier-relationships, which can put them in stronger positions while negotiating deals. Understanding the types of working capital that suit your business model can help in optimizing these supplier relationships. A happy supplier who avails a steady working capital can benefit in the long run as well when larger discounts and recurring bulk orders come into the picture. Suppliers have become the future of the post-pandemic business world since they drive business growth and ensure the availability of revenue and profit goals.
Firm owners who are not keen on availing a business loan with high interest rates may look for alternative funding options like invoice financing. Such a strategy will enable them to raise funds against unpaid invoices at attractive repayment terms.
With KredX, businesses can meet the gap in their working capital via bill discounting. Through our invoice discounting services, one can quickly raise funds as per requirement and meet operational needs more conveniently.
Other than these, businesses must also manage their liquidity by ensuring unrestricted cash flow to manage their working capital proficiently. The key is to keep adequate cash at hand that will help to tackle unwarranted operational disruptions easily.
With the help of active working capital management, a business can benefit in these ways –
Regardless, even a well-thought working capital management plan has its loopholes. For instance, the method of managing working capital does not account for non-monetary factors and seldom accommodates economic changes.
Businesses can take care of such loopholes and other financial gaps in working capital by availing our invoice discounting services. KredX is India’s leading integrated cash flow solution provider that helps businesses use their unpaid invoices to get quick access to working capital.
Across every industry, the pandemic has ushered in several working capital challenges and interrupted business operations for some time now. As the economic uncertainty continues to be a hurdle, businesses need to develop new strategies to finance their working capital that can prevail in the post-pandemic market. Focusing on inventory, payables, and other essential elements can place businesses in a better position to secure adequate cash flow and manage short-term commitments ahead of time. With conventional supply chains dismantled and the exact influx of FDI and remittances still in doubt, firms have to find creative yet local means to generate revenue from the market.
The fact that only monetary aspects are considered, and sudden economic changes are seldom accounted for, limits the scope of managing working capital.
The working capital ratio helps to assess the performance of how working capital is managed. Generally, a higher ratio indicates more liquidity and is considered better.
It is the surplus working capital over permanent working capital. It is also called variable, fluctuating or cyclical working capital.