How To Manage Working Capital?
Working capital is an integral component of every business.
Irrespective of its scale of operation and size, it is
compulsory for business owners to maintain and manage working
capital at all times. To achieve the same, they must create
effective working capital management strategies and implement
them in their everyday operations.
What is Working Capital Management?
In simple words, working capital management is
the practice of managing a company’s current assets and
liabilities. Typically, working capital serves as an efficient
tool for determining a company’s current financial
standing. It further helps to analyse whether a company is able
to meet its immediate debts.
An efficient working capital management helps businesses
enhance their financial health and boost overall
Objectives Of Working Capital Management:
Typically, the primary goals of managing working capital are to
- Maintain smooth operations
- Lower working capital requirement
- Minimise capital expenses related to working capital
- Maximise returns on current assets
Regardless, in case of shortage of working capital, business
owners have an option to seek funding without applying for a
business loan. They can raise funds with the help of KredX’s invoice
discounting services and meet their business requirements
We extend funds within 24 to 72 hours* against simple criteria
and with attractive terms of repayment. This helps businesses to
access funds as and when required.
Importance Of Working Capital Management
Business owners must manage their working capital actively as it
determines the long-term financial standing of their firm. With
the help of active management of working
capital, business owners can generate higher returns on capital
and improve the business’s liquidity significantly.
Improper cash management often leads to negative working
capital, when a company’s accounts payable exceed its
accounts receivable. It also directly hampers a business’s
ability to optimise its operational activities to the fullest.
It is because they require a continuous cash flow to purchase
raw materials, meet sudden expenses and other overhead
Business owners can manage their company’s working capital
by creating suitable strategies and plan of action. Notably,
such strategies must be aligned with factors that affect the
company’s working capital.
This table below highlights the factors that influence a
firm’s working capital.
Type of industry
Conditions of macroeconomics
Company’s growth rate
Availability of funding options and accompanying charges
Cash flow strategy
New technologies and products
Borrowing and investing capacity
Working Capital Management Strategies:
Effective management of working capital includes managing
accounts receivables and account payables. It also depends on
active inventory management.
One can easily manage their firm’s working capital with
the help of these strategies –
Paying off suppliers on time helps businesses to secure
favourable terms of negotiations and services. It also helps
inculcate a better working relationship with suppliers, which
often proves useful in securing better deals.
A business should evaluate its stock frequently. It will help to
avoid a situation where excess cash is locked in the
firm’s inventory. Regardless, they must maintain a
balanced inventory composition so that they can access stock
easily to meet immediate orders.
Keeping a close tab on expenses proves useful in more than one
way. It helps to maintain positive working capital . Also, it
facilitates better cost management and allows businesses to
avoid unwanted expenditures and in turn, bring down operational
In certain situations, zero working capital business may
consider availing a loan. Typically, such a situation occurs
when a firm’s current assets and current liabilities are
equal. Since a firm requires working capital to operate, it can
access money through a loan.
Notably, most business loans come with strict eligibility
criteria and require applicants to meet specific requirements to
access funds. Also, firms with a negative working capital may
choose this strategy to keep their operations afloat.
- Tax-deferrals And Debtors
Applying for Tax-deferrals can help businesses to have tax-free growth. Besides, reassessing contracts and credit terms with debtors can ensure a stable working capital cycle at the right time. Businesses need to keep in mind that they cannot provide an extended repayment window, as it can impact their cash flow growth. CFOs should re-evaluate their credit terms to ensure that the offering to their debtors is relevant to the company’s cash flow requirements. This will lead to better management of credit control systems and preventing late-payment or defaulters.
- Timely Payment To Supplier
When it comes to the payment process, timely repayment is considered a crucial aspect for businesses. A proper repayment plan can improve payables performance and reduce DPO (days payable outstanding) in businesses.
In the post-pandemic scenario, extension in DPO can result in a reflection of liquidity issues and also brings a negative Cash Conversion Cycle (CCC). Therefore, companies need to develop strong supplier-relationships, which can put them in stronger positions while negotiating deals. Understanding the types of working capital that suit your business model can help in optimizing these supplier relationships. A happy supplier who avails a steady working capital can benefit in the long run as well when larger discounts and recurring bulk orders come into the picture. Suppliers have become the future of the post-pandemic business world since they drive business growth and ensure the availability of revenue and profit goals.
- Opt For Invoice Financing
Firm owners who are not keen on availing a business loan with
high interest rates may look for alternative funding options
like invoice financing. Such a strategy will enable them to
raise funds against unpaid invoices at attractive repayment
With KredX, businesses can meet the gap in their working capital
via bill discounting. Through our invoice discounting services,
one can quickly raise funds as per requirement and meet
operational needs more conveniently.
Other than these, businesses must also manage their liquidity by
ensuring unrestricted cash flow to manage their working capital
proficiently. The key is to keep adequate cash at hand that will
help to tackle unwarranted operational disruptions easily.
Advantage Of Managing Working Capital Effectively:
With the help of active
working capital management, a business can
benefit in these ways –
- Ensure liquidity
- Keep operations running smoothly
- Maximise profit through operations
- Improve Financial Health
- Enjoy competitive advantages
Regardless, even a well-thought
working capital management plan has its
loopholes. For instance, the method of managing working capital
does not account for non-monetary factors and seldom
accommodates economic changes.
Businesses can take care of such loopholes and other financial
gaps in working capital by availing our invoice discounting
services. KredX is India’s leading integrated cash flow
solution provider that helps businesses use their unpaid
get quick access to working capital.
Across every industry, the pandemic has ushered in several working capital challenges and interrupted business operations for some time now. As the economic uncertainty continues to be a hurdle, businesses need to develop new strategies to finance their working capital that can prevail in the post-pandemic market. Focusing on inventory, payables, and other essential elements can place businesses in a better position to secure adequate cash flow and manage short-term commitments ahead of time. With conventional supply chains dismantled and the exact influx of FDI and remittances still in doubt, firms have to find creative yet local means to generate revenue from the market.
The fact that only monetary aspects are
considered, and sudden economic changes are seldom
accounted for, limits the scope of managing
The working capital ratio helps to assess the
performance of how working capital is managed.
Generally, a higher ratio indicates more liquidity
and is considered better.
It is the surplus working capital over permanent
working capital. It is also called variable,
fluctuating or cyclical working capital.