We all know that starting a new venture or expanding an existing business requires a huge amount of working capital. By financing your own setup, you somehow manage to pull through. Yet, it isn’t a piece of cake to get hold of the amount you need so as to run a business or purchase something that you may need for its growth.
Once you manage to arrange the capital for your setup, you need to ensure that it is utilized properly and wisely. Lending money from big financial firms is not easy as it sounds, so you need to make the most out of it. There are firms that help you save your time, effort and money by providing best possible solutions and loan options for your business at very reasonable interest rates.
As a business owner, you need to find ways to maximize the cash flow and increase productivity, along with the growth of your working capital in order to make more money.
Working Capital – Why It Matters
There’s no denying the fact that working capital has a significant importance in a business and is often considered the lifeblood for companies that are more product-based. Without having the required business capital to buy material, pay the hired staff, or brand your goods effectively, your company will most likely be at a full stop position.
Many new brands and manufacturers find great difficulty in managing their working capital accurately. If you are able to decode the tricks to smart the management of your business capital, you end up yourself in a huge competitive advantage.
Accurate planning of your assets and capital will let you take huge orders without having to strain the rest of the parts of your new startup.
Tips to Manage Your Working Capital
Here are 5 great tips that will help you in managing your business capital like a pro.
Manage Inventory and Procurement
Sensible management of inventory is considered a pivotal factor in making the most out of your working capital. The abundance of stock items can become a great burden to the cash flow resources of any new or existing business.
Scarce resource of stock can lead to a decline in sales and can result in loss of valuable relationship with customers. When it comes to inventory, it is inevitable to keep a track of what you are buying, just the way you keep a track of what you are selling.
The challenging bit for businesses is to produce optimum levels of stock – forecasting demand and encouraging better communication within and outside departments is one of the steps that companies need to take so as to prevent your business from stocking unwanted stock.
If you are unsure of the stock levels, it becomes quite difficult to achieve the optimum levels, and the business jeopardizes its sales due to a shortage of materials. Scrutiny helps in monitoring the levels of stock.
It’s very important to keep a check and control on what’s being purchased. Investing your capital in the procurement of automated solutions can significantly increase your working capital.
Centralizing and streamlining the process of purchasing helps you in a rigorous authorization method. This particular step helps in preventing maverick that is spent by confirming that procurement officers are only allowed to place an order that is approved by the concerned authorities and from their preferred vendor’s list.
Pay Vendors on Time
Enforcing timely payment to your vendors is one discipline that you should always follow. You should consider making it a must part of your company’s payable process. A fortnightly analysis of your business’s working capital indicates that improvement is possible when payables performance is better, and there are fewer days of payables outstanding, also known as DPO.
Businesses that pay their payables in timely fashion develop better connections with their vendors and suppliers – which as a result put them in a position to negotiate better deals, discount and payment terms.
Improve the Receivables Process
The company should come up with an excellent collection system if it plans to shorten the receivables period. One of the important elements of working business capital is to generate and distribute invoices as its earliest.
Organizations should reassess their process of invoicing in order to eliminate discrepancies and inefficiencies that may hinder the process of sending invoices to debtors. For example, top-notch services firm, Deloitte suggests that relying on technology to electronically generate and deliver invoices increase the collection and billing which eventually lessens the cycle of cash conversion.
The use of technology is also important because it ensures that bills and invoices are free of human error before its final delivery to debtors to escape unnecessary delays in receiving payments.
Manage Debtors Effectively
One of the top ways to make sure that you have enough working capital is by ensuring the timely flow of money. Reevaluating your credit terms and contracts with vendors and debtors can’t be ignored as it ensures that your company is not giving a room to debtors to pay for services and goods – this move can adversely affect your organization’s cash flow.
The CFOs of your company must review credit terms in order to ensure that the credit being presented to debtors is suitable for your organization’s company’s cash flow requirements or not.
Make Informed Financing Decisions
A business can make the most out of their working capital mainly because it comes with no conditions and is interest-free – making it the fastest and cheapest source of money for a business.
As per a recent survey, around 65% organizations do not feel the need of immediate finance. Companies that prioritize working capital allow them to take decisions involving strategic investment; this drives efficiencies and operational performance.
In order to make sure that the working capital is being properly managed, try using your key performance indicators. As you record payables and receivables over time, include KPIs and inventory metrics such as payables outstanding, sales outstanding, as well as inventory outstanding. It is crucial to keep an eye on the metrics as it helps in maintaining a sound and stable strategy of working capital management.
Identifying your company’s requirements is the initial step in figuring out the way to fund your working capital. Even if it’s in the teething phase, or needs expansion, every phase calls for unique financing solutions – Fast Capital 360 – to ensure smooth operations of a business. Since there are multiple means of financing every stage of your organization’s lifecycle, it’s duly important to frequently update requirements and plans within the department with senior management officials.
The crux of the matter is: working capital works as a backbone in running business affairs of your own setup. There are quite a few areas that need your attention especially when it comes to initiating a startup, irrespective of its size. You can still count on the valuable tips shared above to make the most out of your working capital. Once you successfully manage to implement these, you can sure-shot generate huge profits and add value to your organization, making it even more prosperous and fruitful than ever.