What is Working Capital Management, and why is it essential?

April 3, 2023
Updated on

There's no denying that running a small business is a difficult and time-consuming task. There's a lot to keep track of, including market peaks and falls, shifting consumer behaviours, and new industry developments. In between all this hustle, MSME owners often focus only on sales and profitability and end up sidelining working capital management.

Small businesses could easily think that the most important facet of running a business is making a profit, but that's not always true. SMEs can run out of cash needed to finance operating activities such as payroll, rent, and overheads, especially during growth. SMEs can establish the processes and practices to manage working capital effectively by optimizing inventories, receivables, and payables.

The important question is, how can you ensure efficient working capital management, and why is it of the utmost importance to the functioning of your business?

What Is Working Capital Management?

Working capital management is a business strategy for keeping the cash flows smooth and facilitating the continuation of the company's day-to-day operation. Thus, working capital management entails the planning and monitoring of funds to ensure steady cash flow.

Tips to Ensure Optimal Working Capital Management

Follow Up for Payments

Ensure that you process business invoices for customers for all your daily transactions. Your company needs to follow up actively on each invoice and ask for payment as soon as possible. Customers often use disputes or excuses to delay payment, and they might not pay you on time if you fail to follow up.

Another solution is to involve more people within the business itself. Salespeople can use their relationship with the customer to follow up on the initial invoice, ensure no disputes arise, and help chase payment when it falls due. Moreover, an administrative assistant with competitive skills can undertake the calls and messages required to ask for payment and make sure that all communication is logged carefully.

Offer Feasible Discounts

Be careful with offering discounts or extending credit terms to customers. You shouldn't compromise on the interest of your business in order to close a sale by giving a long-term payment or discount. 

Reduce Inventory

Controlling stock effectively has a positive impact on working capital. Along with ensuring popular stock lines are replenished, also focus on overall stock levels to identify which products are working well and which are not. Then you can focus more on profitable ventures. Sourcing is also important. The company can deal with its supplier so that the inventory is stocked in the warehouse but doesn't need to be paid for until it is sold. This policy lowers the costs while maximizing revenues, as will properly planning and managing stock levels to accommodate peaks and troughs in demand.

Grow your MSME with collateral-free business loans

Enhanced Forecast Accuracy and Demand Planning

Developing a system to assess and predict customer demand will help you make good decisions when it comes to business planning. This will help you better manage your     inventory and improve your ability to deliver.

Improved Delivery and Logistics

The most important task of any business is delivery. Your company will struggle to survive if you are unable to deliver effectively. This fundamental business principle holds true whether you are delivering e-commerce packages to consumers' homes, pallets of goods to retail stores and warehouses, or components and raw materials to manufacturing lines. 

Variance management

Reducing product complexity and carefully tracking product variants' demand to determine the most profitable ones is one way to better organize your operations and concentrate on bestselling products.

Secure Credit with Good Lenders

If your small business is struggling to manage working capital, you can also opt for additional funding support through a business loan. At Kinara Capital, we offer quick and collateral-free working capital loans. With features like minimal documentation and a fully- online process, you can avail of the funding in no more than 24 hours.

So, know the importance of working capital management and grow your small business exponentially!

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