Working capital is the lifeblood of business. It is essential for a business to know how to manage the working capital properly, otherwise it can have an adverse impact on the business’s cash flow, and even profits. Managing capital is something that should not only be mastered by businesses making a loss, but also by businesses that are profitable and growing.
Working capital is the lifeblood of business. It is essential for a business to know how to manage the working capital properly, otherwise it can have an adverse impact on the business’s cash flow, and even profits. Managing capital is something that should not only be mastered by businesses making a loss, but also by businesses that are profitable and growing.
1. Seek Payment Early
The secret to efficiently managing your working capital is to always have money coming in. To accomplish that, there must not be any delay in receiving the money owed to you. Most businesses are lax in this regard, and do not get to preparing invoices immediately.Instead, they prefer to wait for a certain date to prepare them Even after the invoice is prepared, there is a usually a 30-day payment period that is given by companies to settle.
The follow-up for payment on these invoices begins only after the due date has passed, leading to further delay in the payment. The best way to tackle this problem is to involve more people in business, such as salespersons, to track and actively pursue payment from the client.
Getting your receivables on time can really give a boost to the working capital and help meet current expenses.
Additional Read:How To Use Working Capital Loans To Strengthen Your Business
2. Efficient Inventory Management and Forecasting
A meticulously-made inventory can make a huge difference to your company’s working capital. A large inventory can take up a huge chunk of the working capital, thereby increasing your assets. However, these assets can also turn into a liability if the stock does not sell soon.
There are many ways using which an inventory can be optimally maintained. One of them is to deal in consignment stock, where the stock is held at your place and payment needs to be done only after it is sold.
The other is accurate forecasting, wherein if you can correctly assess the quantity of products needed, then you can save working capital by not ordering more than needed.There is software available that can help in forecasting. Selling ‘dead’ inventory at high discounts is also one of the ways in which cash can be recovered.
Moreover, an efficient inventory management is closely tied to a scalable and flexible source of finance. For example, Bajaj Finserv Flexi Business Loans you to withdraw and repay funds as per your requirements. This synchronizes well with the need of the inventory and avoids the unnecessary servicing of debts.
3. Offer Discounts Prudently
Sometimes, the sales team, to meet their targets, end up giving discounts to customers. Though giving discounts can help close a sale for good, it can have negative consequences as well. Most of these consequences might not be apparent in the short term, but can have an impact in the long run.
It is wise to make your sales team understand the cap on how much discount they can give. Taking a short training session on the impact that discounts have on the business is a move that can reap dividends later. At the very least, prevent them from over-negotiating to close a deal.
Additional Read:5 Tips To Manage Working Capital for Your Manufacturing Business
4. Keep Detailed Records
Following up and gaining a due payment from the debtor is normally a tedious process. The debtor often makes one excuse after another to delay making the payment further. Therefore, it is in your best interest to keep a record of all correspondence that you have with them. Details such as mode of communication, date, time, agreed terms, etc. should be noted. Keeping a track of what was spoken and agreed upon will, over a period, not give the debtor any room to maneuver their way out of making the payment. The same record-keeping format can also be used if you are the debtor, so that you can also pay on the time that you agreed on, and not before.
5. Be on Good Credit Terms
This is crucial to maintaining the balance in your working capital. A good relationship with suppliers can lead to flexibility and comfort in dealings for both parties. For instance, in case of Bajaj Finserv Flexi Business Loans, the interest is charged only on the amount withdrawn. This allows the borrower to comfortably maintain a healthy cash flow by keeping the lending costs low.
