In 2020, the global supply chains came to a halt due to prevailing economic disruptions. This led to many challenges in managing working capital, especially for smaller businesses. Therefore, around 80% of all MSMEs (Micro, Small, and Medium Enterprises), including public, private sector companies, and MNCs, reported decreased cash flow.
Working capital is considered the lifeblood of businesses without which they stop functioning. Effective cash flow is needed to buy raw materials, run day-to-day operations, pay salaries, and generally keep a business afloat. Also called Net Working Capital (NWC), working capital is the amount of cash available with a business and is measured as the difference between its assets and liabilities.
Another important metric to measure long-term financial health is the working capital turnover ratio. It refers to the ratio between the funds used to finance a company and the revenues generated by them. Having a higher working capital ratio lets a company make a larger amount of sales.
In today’s challenging times, it’s more important than ever for companies to find new sources of working capital finance and exert effective control over them. Given are five effective tips for businesses to manage their working capital.
Table of Contents
Five tips to manage working capital
1. Improving the inventory management
Aside from the working capital, a business’s assets consist of its inventory, which includes items for sale, items prepared for sale, and items produced. Having a highly liquid inventory can cause insufficient supplies compared to demand, while a massive inventory size can increase expenses and waste. A high net working capital can be achieved by reducing slow-moving inventory, avoiding large stockpiles, and increasing inventory turnover cycles.
The ‘just-in-time’ strategic inventory management is one way to ensure your business never runs out of working capital. It involves ordering only as much inventory as needed for production and sales. Another way to manage working capital is to digitize the inventory management process for increased efficiency.
2. Managing suppliers and distributors
Business financing is not just about getting better sources of working capital finance but also about negotiating with suppliers and distributors for better rates. You can improve the payment process, get better terms and pricing, review all contracts, and ask for better prices.
Negotiate for better due dates to balance the gap between payables and receivables. However, also ensure that all financial obligations are always met from your end to avoid gaining infamy among suppliers.
3. To find better sources of working capital finance.
The type of business loans used to supply regular cash to your business can affect working capital expenses. Asset-based financing increases hassle for borrowers. Unsecured business credit offers the necessary funds in a faster and more streamlined process.
Many financial institutions make loan approval much easier with pre-approved offers. Choosing easy financing options for your business will increase and automate the cash flow for maximum effectiveness. You can check your pre-approved offer from Bajaj Finserv, one of India’s leading financial institutions, by entering your name and phone number.
4. Automate the process with e-procurement
Regardless of the source of working capital finances, your business financing will lose money if all expenses are manually managed. It will lead to inefficient processes, errors and carry massive expenses due to hiring a lot of staff. E-procurement can reduce all costs substantially as it gets rids of many tedious and unnecessary processes, eliminates expensive labor costs, and save many expenses in the long run.
A rigorous authorization process prevents unforeseen mistakes, protects the working capital, and reflects up-to-date business practices. You can learn about how to use technology to increase business financing efficiency further.
5. Tracking business performance with data analytics
Most businesses have switched to data-driven decision-making and business financing management. Making decisions and getting access to sources of working capital finance is a lot easier when businesses have relevant statistics. Data analytics make it easy to review operations, monitor various departments, create detailed management reports, and effectively manage working capital.
Selecting the key metrics with proper collection methods is essential to properly gauge the various aspects of a business. Ensure your audit team has training in the latest analytics software and can deal with large volumes of data.
Businesse financing who remain afloat in turbulent times and gain success always effectively manage their working capital. You, too, can ensure yours excel by following some of the above tips.