It would not be wrong to call working capital the lifeblood of a service business. Managing working capital properly is very essential for a service business in India as otherwise, it can affect the business and cash flow adversely. Additionally, the working capital should not only be managed by businesses suffering losses but also the one which is profitable.
Inventory management is the most important aspect for a service business as meticulously-made inventory can hit the business hard. Notably, a large inventory can take a huge part of working capital and increase assets. But in case the stock is not sold soon, it can turn into a liability. On the other hand, if the inventory is minimally optimized, it can affect sales. So, optimal maintenance of stock is important.
The best solution for this is consignment stock, where the service providing company will have stock at his place. But he will pay for it once the stock is sold. The other solution is accurate forecasting wherein the business owner has to accurately assess the inventory he requires in order to save working capital.
Offer Right Discount
The businessman or the sales team might end up offering high discounts to meet the sales targets. Though offering discounts may help in good sales but can have negative consequences on the revenues. And these consequences may not be visible in the short-term but can impact the service business in the long run.
In addition, it is important to know in advance the discount cap that can be offered. A short training session with the sales team can be helpful here.
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Keeping a record of all the details will help in managing things in a better way. Following up with the debtors and asking them about the due payments can be a tedious task. The debtors may also make an excuse to delay the payment. In such scenarios, it is in the interest of the service providing business to have recorded details of everything, mode of communication, agreed dates and terms and conditions, etc.
A track record of what was spoken and agreed, will not provide any room to the debtor to make their way out of the agreed terms and dates. Additionally, the same recording format can also be used for the creditors. This will help in making all the payments on time and on the agreed dates.
The way to manage working capital for a service providing business is to effectively manage the inflow and outflow of funds. And to accomplish, the business owner must ensure that there is no delay in the payment of debts and also in receiving owed money from debtors. The major loophole of most businesses is they do not prepare the bills immediately after sales. Instead, they wait for a certain date for this. A 30-day credit time is given by companies. However, delay in bills delays the payment further.
Getting receivables ready will boost working capital and effectively help in meeting the current expenses of the business.
Have Good Credit Terms
It is crucial for a business to balance its working capital. And in situations where there is not enough working capital, a working capital loan can be availed. This will allow the business owner to sail through bad times efficiently and without much hassle.