Working capital is the lifeblood of every business, enabling companies to cover daily trading operations. By trading operations, one means procuring raw materials, paying wages, salaries, suppliers, etc.
Subsequently, without it, a company cannot run business operations smoothly. Hence, business persons must know their working capital needs, sources of financing and ways to improve and manage working capital to boost their businesses.
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Effective ways to improve working capital and expand a business
- Maintain a good net working capital ratio
Businesses should set a goal to maintain a good net working capital ratio. To calculate this, they can use the working capital formula mentioned below,
Working capital=current assets/current liabilities
Here, figures like 1.0 or fewer quotients in the working capital ratio indicate that a business uses all its resources and has little left. On the other hand, 2.0 or higher quotient reflects that a business is not using the resources at hand.
In the latter case, businesses must invest in equipment or marketing so that they can build their business brand and reach more people. Maintaining a good NWC ratio helps businesses to assess short-term assets and pay off the short-term liability.
- Enhance inventory management
A business inventory consists of items that are kept for sale, items that are used in production etc. Investors often check inventory to evaluate operational efficiency and sales levels. High liquidity of current assets can reflect a gap in product demand.
On the other hand, large inventory can stress cash resources and minimise a business’s current assets due to unnecessary costs, such as warehouse expenses. Therefore, business persons must conduct periodic inventory checking. They can digitise the whole process to avoid overstocking or understocking issues and increase business efficiency in the long run.
- Tackle debtors efficiently
One of the effective ways to ensure optimal working capital is to create a business environment where the money comes from time to time. Here, businesses must reassess their contract and credit terms with debtors to ensure they are not extending too big a window to pay for their goods and services.
This practice or favouring attitude results in delayed payment and negatively impacts a business’s cash flow. Here, a business person must rely on a Chief Financial Officer (CFO) who would help assess credit terms with the debtor and make sure the credit terms offered to debtors perfectly align with a business’s cash flow. Further, they can incentivise customers who pay on time to collect cash and maintain cash flow.
- Track business performance with data analysis
Relying on data-driven business management and decision-making process helps businesses to better handle working capital needs, management reports, monitor operations at multiple levels and review operations.
These practices enable a business to evaluate whether its current business status or operations aligns with financial goals. Further, a data-driven business can easily attract investors and prove their business potential with previous performance, reports and many more. Thus, by following these advanced technology-intensive practices, one can manage a business efficiently and expand it.
- Select vendors that extend offers and discounts
Choosing vendors that provide offers and discounts and maintaining a good relationship is important to improve working capital. Here, business persons must adopt some strategies, such as making early payments to negotiate with lenders.
This way, they can save a considerable amount on expenses, further helping them pay other debts and improve working capital. However, make sure individuals are well aware of terms and conditions to avoid any future discrepancy.
- Manage cash flow gaps
Managing cash flow gaps is one of the biggest challenges every business faces. Therefore, every business person must focus on proper financial management. When faced with a cash flow gap, business persons cannot pay bills, purchase inventory, pay salaries and many others.
However, they can efficiently cover operational costs and resolve this cash flow gap by opting for financial products, such as a business loan. Thus, they can utilise the borrowed money to invest in equipment, infrastructure and expand their business. There are several reputed NBFCs that offer unsecured business loans at competitive rates and improved terms.
Bajaj Finserv, one of the leading NBFCs, provides pre-approved offers to make the loan availing process hassle-free. These offers are applicable on other financial products, such as personal loans, credit cards, etc. Individuals can check their pre-approved offers by entering their names and contact details.
Assessing working capital needs helps individuals to manage the operating cycle efficiently. Further, by following the ways mentioned above, they can improve working capital and expand their business.