If you are handling a business, you already have hands-on experience in working capital management, even if you call it by any other name. You manage the cash coming in and going out. You check which product is selling well and needs to be stocked. You may even provide the customers with an option to buy now and pay later and follow up with them to make sure the money comes. Managing these tasks is most important for the success of a business.
Working capital is defined as the difference between your current assets and liabilities. Vital for your business, this determines your profitability and survival. Lenders check your working capital before approving a loan for you. Ineffective working capital management can attract higher interest rates on loans.
So, how do you improve this all-important factor? Financial products like the Bajaj Finserv Flexi Business Loans can help you improve the condition of your working capital
Additional read: How to use working capital loans to strengthen your business
Here are some tips you may find useful in the management of working capital:
Proper cash flow forecasting
You need cash to run your business, so you need to plan. When you invest cash to buy goods, how long does it take to sell them and get the money back? Your business may be undergoing seasonal effects. Most of the annual sales may take place in a couple of months. Is it during Christmas or Diwali, or Pongal? How much extra cash do you need at that time? Do the customers pay on time? Do they buy more on credit, or do they prefer cash? When do you need the cash, and how can you get it?
Note down the answers to these questions so that you can plan for all the possibilities. If you face a shortfall, you can be prepared.
Manage your short-term financing needs
Sometimes, despite excellent planning, unexpected things happen. Prices may go up, or your best customer can ask for more time to make the payment. In such cases, it is better to have an alternative ready to manage the cash shortfall until payments get cleared.
We, at Bajaj Finserv, provide speedy disbursal of loans for such emergency needs at a very competitive interest rate.
Additional read: What information do you need to apply for a business loan
A balance between expanding business and managing receivables
This important factor often gets overlooked in working capital management. When you provide a credit facility, customers generally make use of it. Your business grows, but your receivables grow too. Will all the customers pay you for the goods or services? Will they pay back in time? How much bad debt can you absorb if some of them fail to pay?
Find a balance between growing your business and maintaining the flow of receivables. Set some criteria. You can choose to provide the credit only to existing customers with good track records. Give them some incentives to pay early. You may even decide to provide some discounts for long-overdue accounts instead of simply writing them off.
Sales discounts: make use of them
Sales discounts can be useful to reduce the amount of money you owe to your creditors. The sales discount on your invoice may be written as ‘3/15 net 50 terms’. This means if you pay within 15 days, you will get a 3% discount on the invoice amount. If not, you need to make the full payment in 50 days. In this case, early payment is beneficial for you. You will save more by availing of the discount.
Look for creditors giving you a discount or ask your existing creditors for such a discount. The amount saved will help manage your working capital. Run a tight ship, and you can earn more profit. Find out how the money rollover can be faster. Check for leakages and plug them.
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