How To Manage Working Capital?

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 profitability. 

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 quickly. 

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 costs. 

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.

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 –

• Pay Suppliers On Time

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. 

• Inventory Management

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. 

• Control Expenses

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 expenses. 

• Consider Availing A Loan

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. 

• 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 terms. 

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 invoices to get quick access to working capital.