Working capital is an important factor for a business to run successfully – be it an SME or an MNC. And so, its management is also important. It takes skills to manage working capital. However, with a few considerations, working capital management can be done easily. In this blog, we shall discuss what working capital is, the need of working capital management, and how to manage it.
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What is the Concept of Working Capital?
Working capital is the relationship between a business’s short-term liabilities and assets. Simply put, it is a way in which a business manages its expenses and income generation. Working capital involves the everyday expenses of a business. The examples of working capital include payment of salaries and wages, utility bills, rent, traveling cost, etc.
An efficient management of working capital ensures that the business runs smoothly and is able to repay its short-term debts and expenses. The most basic things that involve capital management involve managing inventory, accounts payable, receivable, and cash.
What is the Importance of Working Capital Management?
Also Read: When To Apply For A Loan For Business?
Working capital management is a secret behind the sustainable growth of a business. In case a business runs out of money to finance its everyday expenses, the production of products and services will stop. In such a situation, the business will fail to cater the customers and will also fail to attract new customers.
This can affect the short-term as well as the long-term stability of the business. And therefore, it is important to manage working capital. Let’s take a look at some working capital management tips:
Keep an Eye on Expense
Even a minor and smallest expense add up and every little thing takes something out of your capital. So, be sure you keep an eye on it and control your expenses. You can also set rules for your employees to keep all the expenses to a minimum. In addition, since you are the business owner, you need to cut back on costs wherever you can.
Improve Receivables Collection Process
Many people have working capital which is trapped in the unpaid invoices by the customers. If this a continued process by your customers, try to adjust your collection and receivables process to secure money on time.
Also, when you are auditing your invoicing system, you can think of ways to shorten the payment cycle. In addition, you can also offer discounts to your suppliers on the timely payment.
Pay on Time
In addition to improving the receivable process, you are also required to pay your vendors on time. It will improve the cash flow in long run. It is found out that businesses that have shorter days of accounts payable, they have a good relationship with vendors. And with a better relationship vendor, you can negotiate with them.
And when negotiating, you can get better deals with them, get discounts, and payment terms. At last, if you keep the vendors happy, you can save money spent on various expenses–helping with working capital. This step is very important especially for growing business.
Reinvest in your Business
Reinvesting in the company is a good thing for business. And also, this is an ideal way of growing business. Just make sure that you have kept some money aside from your regular expenses for investment in the business. And in case you do not have, you can avail a working capital loan.
Reinvesting in the business can include buying new machinery (you can avail a machinery loan for this), investing in the capital loan (a business loan can be availed for this), and host a number of events to let the customers see and know about your products. There are a number of NBFCs and online lenders that offer online business loans. You can look forward to avail a loan for business from them.