As an entrepreneur, there’s no doubt you’ve heard someone tell you that one of the easiest ways to move up the grid is to manage your working capital. Although tricky, if you’re able to master the management of your working capital, you’ll save yourself a lot of time and certainly, a lot of coin.
Before we delve into the ‘how’ of things, let’s address the ‘what’ and ‘why’- What is Working Capital and why should I care?
Working Capital is the difference between your current assets and your current liabilities. It tells you how many liquid assets you have, in the short term, after your short-term liabilities are paid off.
Managing your working capital should be a priority as it is an accurate way of measuring your company’s financial health.
If and when ineffectively managed, your ability to expand, improve processes or even operate your business is significantly hampered as you’re also suffering from cash flow problems. It isn’t a pretty sight. Here’s a list of things you want to keep in mind while you’re trying to effectively manage your working capital:
Know what you have. Try and strike a balance between having too much and having too little. Having too much places a heavy burden on your cash resources. Having too little could possibly result in lost sales and damage to customer relationships. You need to know what you’ve bought and what you can sell.
One of the ways to achieve a balance is to promote communication between the different departments of your business. You can also look to forecast demand, this will also further help understand how many levels of stock are necessary and how many aren’t. Another way to effectively manage your inventory is to centralize and streamline the periodic checking of your inventory.
Pay suppliers on time
Although it feels like a better idea to pay your suppliers on the later side, if you pay earlier you’re likely to build and develop healthier relationships with them. This will allow you to negotiate favourable deals in the future. If possible, assign someone you know to each supplier that can build a respectful working relationship.
Know where you’re spending
You need to know to whom, what, and where your money is going. It is easy to ignore smaller expenses but it’s the smaller expenses that pile up and significantly affect your working capital. Set budgets for yourself and monitor your expenses regularly.
What’s up with your Stocks?
Again, effectively managing your working capital is just a lot of balancing the right things. You need to ensure that you don’t have too much of your excess cash flow locked up in stocks. But, at the same time, you should have enough stock on hand to convert immediate orders. It’s easy to overbuy if communication between departments is all over the place. If you do bi-annual or quarterly stock checks, you’ll be able to keep track of what you have and what you don’t.
Emergency Loans make for great short-term solutions. Keep a lender ready to help you bridge any shortfalls that you may have with your working capital.
This is essentially borrowing money and using your assets as collateral. With this, you’ll be able to negotiate deals in a healthier fashion. This is primarily because, it is a longer-term method of financing, with competitive interest rates as the loan is secured on an asset.
Invoice Factoring & Discounting
Invoice factoring or discounting allows you to borrow close to 85% of the value of your invoices when you raise them. Of course, then you repay the loan- interest and all- once your consumers have paid you. You can also outsource your debtors to factoring and finance companies, their expertise could mean faster payments and hence lower interest charges.
But, it is understandable to keep control over your own debtors so that your consumers aren’t dealing with a third party. Here, invoice discounting would be your preference as it simply provides financing against invoices.
Although tricky, if you manage your working capital not only will you be able to stay in business but also have money to pay your employees and suppliers, take on more orders and customers while also being able to invest in the future of your business.
When it comes to the future of your business, consider joining the Intuit Circles community. A strategic startup ecosystem engagement initiative by Intuit, the community facilitates business growth and knowledge for startups through smart-tech. It aims at powering prosperity for startups by providing for some of their biggest needs.
Thank you so much for sticking around, we’ll see you next week as we have Gaurav Kumbhat, Product Manager, Intuit India talk about Product Market Fit! To know what 6 things to keep in mind while building your product, click here!