4 Smart business strategies to boost your working capital

17 JULY, 2017

Called the lifeblood of business, working capital helps businesses stay agile and run smoothly. The presence of working capital in the business ensures that you have enough funds to manage the day-to-day expenses without any hiccups.

 

What is working capital?


Working capital is the difference between your current assets and current liabilities. It is those business funds that are used to meet the short-term obligations of your business. In a business, the use of working capital is to meet operational expenses such as wages, overheads, inventory, administration expenses, etc. Working capital management is crucial to enhance business revenue and ensure it is run smoothly.

When there is a lack of funds in the company, most people’s first thought is to seek external aid to finance their working capital needs. While that can be a helpful option, you can try some alternatives first. You can try to boost your working capital internally by using some smart business strategies. Here are four business strategies that can help boost working capital.

Strategies to boost working capital

 

1. Negotiate with the stakeholders

To manage working capital, it is crucial to negotiate with the suppliers and shorten operating cycles. You must keep the sales to cash cycles as short as possible to avoid getting funds tied up in production and sales. Having a long duration for payments can increase the chance of non-payment and reduce your working capital. You can reduce the operating cycle by asking for deposits, reducing credit terms, and immediate billing. Also, you must calculate payment from the date of receipt and not the date of invoices.

 

2. Credit checks on customer

If a customer does not pay timely, your working capital can be hampered. In a Business-to-Business (B2B) venture, to avoid this situation, it is best to do credit checks on your new customer to track their creditworthiness. By researching their repayment capacity, you can reduce the chances of defaults. You can check the customer's repayment capacity by gathering reports from public records about payment history, tax liens, and bankruptcies. Also, after you have sold your products, it would be best to contact customers to remind them about the payment. If you have a wide customer base, you can automate customers' payment reminders and reduce bad debts and defaults.

 

3. Opt for trade insurance

Trade insurance is one of the best ways to manage working capital finance. Trade insurance helps avoid a shortage of working capital in case of non-payment of account receivables. If your customers do not pay on time, you could face issues managing your finances. However, trade insurance can also protect against bad debts and defaults. Also, you can maintain the cash flow and secure your earnings without worrying about account receivables. It can also help you get necessary financing at better interest rates from lenders. 

 

4. Reduce expenses

Often, we end up indulging in unnecessary expenses leading to elevated spending and reduced working capital. Analysis of your variable expenses to uncover extravagant expenses and help reduce costs. You can also negotiate with vendors and utilise discounts and get better pricing.  Moreover, reduce bad debts and free up working capital by increasing margins across your offerings. You can also opt for credit management services and collect payments faster. 

 

Effective management of working capital is crucial to maintain the agility of your business and to ensure its smooth working. These strategies can help you boost your working capital and maintain your cash flow for daily business needs.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.