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The previous year sang praises of the companies that excelled in their areas and successfully brought their initial public offer. While it reflected on their ability to strategize and grow exponentially, it also displayed their skill in managing their working capital. While earning revenue and expanding business is crucial, it is more important to know how to manage them. For the smooth operations of the business, you must manage your working capital well.
These tips can help you manage your working capital effectively.
What Is Working Capital?
Working capital is the difference between current assets and current liabilities. It is the revolving fund necessary for any business's survival. Working capital is used to pay for inventory, creditors, miscellaneous expenses, etc. Without adequate working capital, it can be challenging to run the business smoothly.
Ways to Manage Working Capital
It is no secret that a business cannot work without adequate cash flow. To ensure the smooth functioning of the business, it is crucial to know how much cash flow your business needs. The amount would differ based on your sales schedule and on the time it takes your business to get cash back after an investment. It would be best to forecast your cash flow needs during the start of the year for working capital management.
Working capital is usually required to meet short-term needs. While you might have that in order, you must always be prepared for unexpected expenses. These could be a sudden increase in the prices, delay in debt clearance, a strike or an emergency. You must have a plan ready to manage these needs and have adequate working capital to meet them. It is best to identify such requirements and make requisite arrangements.
While the expansion of the business is crucial, you must know how to manage your receivables. You could be providing credit facilities to customers to grow your business, but you must be cautious while doing so. The best way is to decide on the limit of credit you are ready to give to the customers to maintain the flow of receivables. If the customers do not pay on time or fail to pay altogether, it can significantly hamper your business. You must determine the amount of bad debts your business can absorb and accordingly, decide who you want to give credit to.
Often creditors provide sales discounts to encourage timely repayment. These sales discounts can help you manage your working capital and reduce the amount you owe them. Many creditors follow the rule of 3/15 net 50 terms, where you get a 3% discount if you pay the amount within 15 days. If you pay after 15 days, you would need to make the entire payment within 50 days. If you make the payment early, you can avail the discount and save money.
To ensure the growth and success of a business, you must procure and manage the working capital as per needs and viability. It is important to identify the needs and manage the cash flow and working capital. While availing loans like working capital and business loan for small businesses ensure that you use these tips for maximum output.
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