How to manage working capital effectively for your business
23 August, 2023
Working capital is the life-blood of a business. How you handle this capital can determine the long-term financial health of your business. Manage it well, and you can improve liquidity, build in efficiencies, ensure seamless operations, increase your profits, and grow your business.
To be able to do so successfully, you will have to avoid making these five common working capital mistakes.
Don't spend without a plan
Planning is everything if you want to manage your working capital effectively. It is imperative you have a clear picture of all inflows and outflows. Factor in details and timelines of how you are going to spend every penny. This includes expenses such as employee salaries, inventory, operational costs such as rent, utilities, website costs, etc. Once you have a proper plan in place, stick to it as much as possible.
Don't deplete your entire working capital
Just because you have a healthy amount of working capital with you does not mean you use all of it. Don't overspend or undertake unnecessary expenditures. This means you shouldn't get a larger office if you don't need it, don't travel for work unnecessarily if you can manage a client meeting over a video call, or don't invest in new machinery or technology for your factory just because it is the 'in' thing to do. Keep this capital instead for contingencies or to give your business a fillip.
Don't mismanage your inventory
If you are just starting your business, it is easy to mismanage inventory or raw materials. Begin with a manageable inventory basis your understanding of market dynamics. Over a period of time, as you get tangible data on your demand-supply needs, you can efficiently plan for inventory flow. Maintaining excessive inventory at a time can block your precious working capital, increase holding costs and, in some cases, also increase damage costs. If you do find yourself holding a lot of raw materials or inventory, it would be prudent to liquidate via discounted sales.
Don't neglect the timely collection of payments
The best way to ensure that you have enough working capital available at all times is to make sure that you have money coming in regularly. For this, you need to collect payments periodically. Review the credit terms you have with your debtors. The credit period should not be too big as that can negatively impact your cash flow. To mitigate bad debts, implement strict credit checks and have a stringent process in place to follow up with late payments.
Don't miss paying your vendors
Just as you need to collect payment on time, you also need to pay off your vendors. Putting off vendor payments will only increase your liability and put undue stress on your working capital balance. It may also affect the relationship with your vendor. In fact, if you have adequate funds, you can negotiate favourable payment terms. For example, you can ask for a small discount on early payments. Even a small 2% or 3% discount over the long term can translate into significant savings.
Now that we have covered what not to do, here's what you should do – get the right financing. To finance current operations or grow your business, you can acquire credit financing from a reputable bank. HDFC Bank offers Working Capital Loans to give companies a much-needed financial push when they need it. From bill discounting services and overdraft facilities to tide over short-term needs to collateral-free loans under Credit Guarantee Trust for Micro & Small Enterprise (CGTMSE) and term loans for long-term projects, all your business banking needs can be fulfilled at HDFC Bank.
Use these tips to avoid common mistakes, manage your working capital effectively and elevate your business to the next level.
*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.
