How Can SMEs Efficiently Deal With Their Working Capital?
SMEs are perhaps the most crucial drivers of economic growth in India.
According to the latest figures, there are more than 42.5 million SME units, accounting for the production of 6000+ items. However, the numbers also speak of the stiff competition that prevails in this sector. In this context, working capital management is one factor that effectively determines a company’s survival and growth trajectory.
But, there are a few challenges that SMEs face in managing working capital efficiently, like:
- Insufficient resources to undertake data-driven financial planning.
- Delayed payments from customers or lengthy cash cycles.
- Lack of credibility that prompts financiers and suppliers to be reluctant in forwarding credit.
- Dearth of adequate know-how regarding financial management.
While some of these issues like data-driven financial planning, can be curtailed over time as a company grows, whereas others require proactive engagement.
Ways To Improve Working Capital Management
Proper management can make a world of difference in how a company performs in the long-run. Hence, for an SME, the primary concern should be to ensure that cash flow problems are kept at bay.
While each company’s working capital requirements and ways to improve its management differ, there are a few broad approaches that can be applied to various enterprises.
Paying Suppliers On Time
There’s nothing more effective in building credibility than paying your suppliers on time, and perhaps, maybe even early. Nevertheless, it may feel counterintuitive from a cash flow perspective. But, ensuring you are at speed with payments goes a long way in developing better relationships with creditors, which you can later leverage to strike better deals, negotiate convenient terms during cash crunches, and receive discounts as well.
Engage More With The Finance Department
Traditionally, overseeing working capital management is the prerogative of a company’s finance department. However, working capital’s compass stretches organisation-wide. Hence, better results may be yielded with a structure where every management team forms a thorough understanding of working capital. You can set up training programmes to ensure a cohesive approach towards managing finances.
Deferred payments from debtors are a major area of concern for SMEs. They can severely impact a company’s financial standing, causing disproportionate cash inflow and outflow. Besides, varied receipt terms can also hurt a business’s finances, especially the small enterprises.
Hence, it’s essential to streamline this process and strike a balance between the expenses incurred as well as the income received. It is important to bring everything in one place, track payment dates via digital calendars, issue invoices on time, send reminders, etc.
Some situations call for external financing. These include undertaking a new project which will require substantial investment or tiding over seasonal fluctuations in sales. In these cases, it’s ideal to resort to services like invoice discounting, whereby you can leverage unsettled and approved invoices to avail credits.
With such a working capital loan, you can pay suppliers, take care of overheads, settle warehouse rents, and do much more. It does not result in any hefty burden either as you can easily repay, once your customers have remitted their dues.
Credit Check Of Customers
Whenever you’re extending credits to your customers, it is wise to verify their credibility first. That way, you can curb the problem of bad debts considerably and ensure timely payments.
Deft Inventory Management
A crucial part of managing working capital efficiently involves inventory management. Just as a deficit in a stock is an alarming situation, an excess of it can be adverse to your business’s finances. That’s because , slow-moving inventory can lengthen your cash cycle.
Hence, it’s essential to track your company’s stock minutely and ensure that the levels are always optimal, neither high nor low. To do so, you may consider facilitating improved correspondence between the concerning teams or the departments. For instance, if your manufacturing department is up to speed with the sales department, they’d know when to ramp up production, and when to dial it down.
Monitor Expenses Carefully
As a business grows, it becomes particularly challenging to track expenditures. That’s one of the reasons SMEs struggle with scaling. In the hustle-bustle of growth, expenses can fall through the cracks and also pile up, only to pose an imbalance in cash inflow and outflow. Hence, it’s imperative not to lose sight of expense monitoring even when your company is growing rapidly.
Adopting these measures can aid businesses to improve their working capital management, and keep their operations running smoothly.
Working capital is a critical indicator of a company’s financial health. Hence, investing time and various resources can go a long way in improving a business’s prospects, particularly with the SMEs. Additionally, it also creates a robust framework for future growth and expansion.