Working capital is considered an essential metric that helps analyse the financial health of a business for a longer period. It is evaluated based on the comparison of current assets to current liabilities.
Moreover, effective working capital management ensures that sufficient cash flow is maintained by businesses, allowing them to fulfil their short-term endeavours. However, if a business fails to manage its overall capital efficiently, it can lead to cash flow issues, such as asset liquidation, legal problems, and bankruptcy.
Therefore, efficient working capital management should be a business’s priority.
4 tips to improve working capital management in India
Now that borrowers know about working capital meaning, they can follow some of the effective tips to improve working capital in the business.
Tip 1: Inventory optimisation and managing procurement
Managing inventory optimally plays a significant role in maximising net working capital. If a company’s stocks are in excess, this can negatively affect the cash resources of a business. On the other hand, inadequate stocks can reduce sales and damage customer relationships. Moreover, organisations should emphasise establishing healthy communication between departments to avoid unnecessary stock levels. Therefore, these measures can help enhance the working capital management approach.
Tip 2: Timely payment to vendors
The assessment of working capital level indicates that organisations that make timely payments to the vendors can establish healthy relationships with the vendors. Also, such organisations can accomplish better deals, payment terms, and discounts. It is basically a contradictory approach to working capital management. If vendors are kept happy, it can help in significant cost savings in the long run by ensuring substantial discounts on massive orders and maximising credit period.
Tip 3: Make effective financing decision
Working capital management allows organisations to make strategic investment decisions. This will assist in driving efficiencies and operational performance. On the contrary, the shortage of sufficient liquidity for necessary business operations due to unpaid invoices or assets being bound in the inventory can significantly impact cash flow. Therefore, to calculate working capital requirement for the business and improve it, making an informed decision is essential.
Tip 4: Manage receivables efficiently
Apart from learning about how much working capital your business needs, it is also essential to manage expenses strategically. For this, organisations need to reassess their debtors and credit terms that will ensure that they do not give a big window to the debtors for payment. Another major issue that organisations face is bad debts.
However, to minimise bad debts, organisations must implement stringent credit checks. Introducing technology to ensure automation of the account receivable process and can reduce the receivables period through collections and prompt invoice processing.
Thus, to ensure sufficient resources, an organisation needs to maintain its cash flow and monitor different types of working capital involving permanent, gross, reserve, seasonal working capital, etc.
In this regard, prospective business owners can opt for financial products like a business loan to cover operational costs efficiently and resolve this cash flow. With the funds, borrowers can invest in the equipment, maintain infrastructure and expand a business. Various leading financial institutions extend unsecured business loans at competitive interest rates and flexible loan terms.
Moreover, for faster loan processing, one can always choose pre-approved offers for a range of financing options such as personal loans, business loans, credit cards, etc. These offers significantly minimise the hassle of extensive documentation and save time. To check your pre-approved offers, mention your name and contact details.
To sum it up, business owners can avoid a cash flow shortage and ensure uninterrupted business operations by following the tips above and efficient working capital management. Moreover, one must always find ways to improve cash flow management, vendors, and customers.