The ongoing COVID-19 pandemic has emerged as one of the challenges for the business sector. It has not only hampered the financial performance of small and medium-sized firms but has also hindered the profitability of large companies as well.
As per reports, sectors like tourism, hospitality, air transportation and entertainment are among the worst-hit ones. Other than those businesses in retail, consumer goods and commodity-oriented industries are also hit hard.
Besides the global crisis, disrupted supply chains and depleting cash reserves of businesses has increased the cash flow gap. Additionally, the pandemic-triggered recession has led to a massive liquidity crunch in the market, further widening the credit gap. Nonetheless, with the help of effective treasury management in addition to implementing financial strategies, companies can maximise working capital and combat the impacts of COVID-19.
That being said, take a look at the impact of this global crisis on working capital management.
Some of the immediate impacts of the pandemic on cash management are discussed below –
Irrespective of their scale and size of the operation, businesses can improve their current financial performance by adopting effective working capital management strategies. It will also prove useful in liquidity management, thereby improving financial performance optimisation.
These are among the most effective strategies for maximising working capital –
To combat the impact of the crisis, companies should focus on minimising their working capital requirement. One of the best ways to do so is by emphasising on a company balance sheet, especially in areas like accounts receivables, accounts payable and inventory.
Reducing the firm’s variable cost is probably one of the quickest ways of lowering its cash outflow. In fact, swapping fixed costs to variable expenses proves useful in preserving core business.
Shortage of raw materials has disrupted the supply chain of most sectors to a great extent. Businesses are now advised to update their inventory safety parameters to gain better insight into the demand and supply side volatility. They should try to secure additional inventory to buffer the impact of prolonged disruption in the supply chain and subsequently strategise to clear the existing stock of finished goods.
Having a fair idea about the immediate and future cash flow helps businesses to ascertain their financial standing. It helps in developing suitable strategies for sound liquidity management and modifying the capital management plan and investment strategies. For instance, it will allow businesses to decide which capital investments should be reconsidered in this current situation or delayed altogether.
A business needs to be more active when it comes to monitoring increasing indirect costs and assess their impact on overall product margin. An active outlook will help to lower unnecessary costs and will help mitigate financial risks successfully.
Maintaining working capital at all times is essential to cope with the impact of COVID-19 on business. Since both production and sales are stagnated, the scope of maximising working capital is relatively narrow. However, the best way to inject cash flow into business is by looking for alternative financing options like invoice discounting. Such a funding option availed from KredX enables companies to raise a substantial amount of funds within 24 to 72 hours* against your businesses’ unclear invoices.
Other than these, businesses may also consider adopting technological solutions related to payment management and cloud-oriented treasury to maximise working capital effectively.
KredX is India’s leading integrated cash flow solutions provider that allows companies to get quick access to working capital by utilising their unpaid invoices. You too can raise funds and shorten your firm’s working capital cycle by uploading unpaid invoices on our portal.