Having a planned financial strategy is a crucial aspect of every company, and it is one of the key factors that decide the company’s growth. A slight imbalance in capital management like excess/lack of inventory, delayed payments to the supplier or from the customer, financial conflicts within the organization, etc., impacts the growth of an enterprise drastically. Hence, there is an increasing demand for Working Capital Management which can continuously optimize the capital and increase the inflow of cash across the enterprise.
What is Working Capital Management?
Working Capital Management is a tool that helps to manage an enterprise’s capital by effectively balancing assets and liabilities to gain maximum benefits financially. A very basic way to calculate Working Capital is by calculating the Current Ratio:
Need for Working Capital Management
In large enterprises, CFOs mainly concentrate on three areas to improve working capital:
Synchronizing supply with the financial strategy
A lot of factors are considered while drafting the financial plan for an enterprise like cash efficiency, process optimization, reduced human efforts, etc. All the efforts can go in vain if the supply does not sync with this plan and hence, a CFO must ensure that the supply is always following the financial plan.
Leverage analytics and other tech innovations
Technology has proven to be the best buddy in the financial industry and CFOs are exploring ways to implement its strong capabilities like analytics, AI, ML, etc., to leverage the big pool of data, collect useful insights, and plan their capital management accordingly.
Strike a financial balance across different departments
It is a daunting task to ensure that each department is aware of and follows the financial plan of your enterprise. In most cases, there are conflicts and CFOs have to resolve such issues and have balanced communication across departments to ensure efficient capital management.
For SMEs or MSMEs, it is imperative to ensure they have a foolproof capital management strategy, as it is practically difficult to have excess liquidity as compared to large enterprises. Three key aspects fall under working capital management, namely accounts payable, accounts receivable, and assets and inventory. Enterprises that maintain a perfect balance among these three aspects excel in their growth.
However, this is a tricky game as your accounts receivable is your customer’s account payable. If they delay your payment to balance their working capital, it might affect your accounts receivable, hence, working capital. The same logic can be applied to your suppliers where your accounts payable becomes their accounts receivable. Hence, you need to have a planned working capital optimization strategy that does not affect your relationship with both supplier and customer.
Capital management or finance management starts in every household as all of us plan our financial moves based on our income and spend ratio. This personalized experience tells us the importance of working capital management. Here are some of the benefits of working capital management:
1. Liquidity maintenance
Working capital optimization aids in seamless cash flow improvement across every division of the enterprise.
2. Employee happiness
With working capital management, your optimized cash culture helps you to manage all your employee wages, bonus, etc., with no arrears making employees elated.
3. Easy loans and high-range discounts
Working capital management helps you to clear all your dues on time, hence, gain a healthy relationship with your clients. With this reputation, the next time you approach any lender, you can get easy loans or high discounts for any products or offerings by your clients.
4. Financial backup during the crisis
Working capital management helps you with not just profits but safe funds which can help you sustain during any crisis.
5. Long-term profitability
Working capital management helps you to leverage your working capital to plan both short and long-term profitability.
6. Lead in the market
With ample cash flow in your enterprise, you can invest in any latest innovation and become a leader in the market.
Tips to have efficient working capital management
We understand that working capital management is a tricky task and you always need to have an eye on it. Here are a few tips that can help:
1. Electronic Invoicing
Electronic Invoicing helps to create an organized invoicing process using automation. This way, you can maintain the consistency of sending invoices on time for your borrowers. This automated invoicing converts purchases into invoices immediately with no human errors, hence, giving a chance for your borrowers to pay you on time.
2. Managing Inventory
A lot goes into maintaining the right amount of inventory. While excess stock might be costly, a lack of stocks will compromise your customer relation. Hence, it is important to strike the right balance. Understand the real-time stock necessity and availability of each department in your enterprise and plan your inventory accordingly.
3. Reduced DPO
Lower Days Payable Outstanding or DPO indicates your ability to clear dues on time, hence maintaining a healthy relationship with your vendor. Currently, enterprises are greatly affected by the pandemic and need a significant amount of time to stabilize their business. In such cases, paying your vendors on time will not only build trust but also help them grow.
4. Every Penny Counts
Every SME or MSME needs to understand the importance of even a single penny. Usually, in such an enterprise, even a minor decision undergoes different rounds of discussion as it greatly impacts the company’s growth. Hence, always ensure not to ignore even minor expenses and maintain a record of them.
As essential as working capital management for every enterprise, it is equally difficult to plan and execute a foolproof strategy. Hence, we at Spice Route Finance help you with a personalized working capital optimization strategy by analyzing your financial data and other aspects and improving your working capital cycle in the long term. Some of our services include:
Strategic planning and profitability analysis
Deal and Business advisory
Cash flow management
Address regulatory requirements
Develop business KPIs
You can reach us at email@example.com if you need help setting up working capital management in your organization.