How To Maximise Working Capital During The COVID-19 Crisis?

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.

Impact Of Crisis – In A Nutshell:

Some of the immediate impacts of the pandemic on cash management are discussed below –

  • Cash Flow And Liquidity Crunch - Poor working capital management, coupled with the delay in receiving payments from customers, have subjected businesses to severe cash crunch. Additionally, the stagnation in sales has led to the accumulation of stocks and has resulted in a liquidity crisis. 
    • Disruption In The Supply Chain - The impact of this pandemic has disrupted supply chain globally and has hampered the overall production process to a great extent. One of the most noteworthy problems persisting in the supply chain is the inability of businesses to procure raw materials right away. 
  • Increase In Credit Risk - This entire phase witnessed an upsurge in the rate of reported defaults, bankruptcies and insolvencies. 

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. 

Tips To Maximise Working Capital During Crisis:

These are among the most effective strategies for maximising working capital –

  • Emphasise On Cash-To-Cash Conversion Cycle

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. 

  • Lower Variable Cost

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. 

  • Improve Inventory Management

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.  

  • Evaluate Immediate Liquidity 

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. 

  • Identify And Assess Financial And Operational Risks

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. 

  • Consider Alternative Financing Options

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.