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Working capital is a crucial indicator of the financial health of any business. It refers to the amount of money required for the day-to-day operations of the company.
Due to the prevalent economic uncertainty, companies have taken many steps to conserve finances and ensure liquidity. Other transactional issues have also made an impact on working capital use and availability. For instance, some companies have delayed payments to suppliers or are impacted by delayed customer payments. Unexpected expenses related to the pandemic disruptions have also made a dent in the working capital.
As businesses move ahead, grappling with these issues, they must look objectively at the changing scenario and be ready to leverage working capital for their company effectively.
Here are some pointers that will help businesses assess the changing dynamics of working capital:
Traditionally, the time difference between the revenues coming in and the expenses that need to be met pointed out the amount of working capital required.
Today, there are disruptions in the supply chain. Constantly changing local regulations in response to containing the spread of the virus impact deliveries and supplies. This delay, in turn, impacts cash inflows and outflows.
It may be a good idea to re-evaluate how working capital requirements have changed in response to the changing business cycles. Many companies find that electronic invoicing reduces their cash conversion cycle by streamlining processes.
Logistical issues regarding supply and availability, fluctuating customer demand, and plunging revenues make inventory management all the more challenging and crucial post-COVID.
Several businesses might be holding on to stocks to meet the probable sudden surge in demand once the situation settles down. However, holding excessive inventory comes with cost implications of carrying supplies and insurance expenses. The result is that more working capital is blocked in inventory and deteriorates cash position. In comparison, understocking could lead to missed sale opportunities that can cost the businesses heavily in these times.
In these challenging times, companies must invest in robust forecasting processes that help optimize inventory management based on information available. It will require businesses to take heed of changing scenarios and closely monitor trends post-covid to maintain optimum stock levels.
Additional Read: What should be your investment strategy in a post Covid world?
Small businesses are often more adversely affected in uncertain times. To ensure that the operations of supply chain partners are not disrupted, larger companies must make sure that outstanding payments are not impacted. The use of supply chain financing could help hone and streamline payables and receivables to a large extent while extending support to partners.
Reach out to Tata Capital trade finance experts to know more about structuring a supply chain finance solution that works for you and your ecosystem partners.
It is essential to forecast your cash requirements in light of the new scenario. What are areas of your supply chain or revenue generation most impacted? What are the probable unplanned cash needs? What are the anticipated short-term and long-term fund requirements?
Gain insight into the changing working capital requirements to optimize it efficiently. Remember, excess cash is unhelpful as it can help earn better returns when invested wisely, whereas a shortfall of working capital can impact a company’s operations. Neither holding excess working capital nor inadequate liquidity is good for business continuity and prosperity.
Each business has specific needs. Does your business require higher working capital finance at particular times of the year? Does seasonality impact it? Has it been adversely affected by the pandemic, or has the pandemic created unprecedented demand, such as for pharma businesses or online learning services?
Take time to gauge how the external circumstances impact present and near-future business requirements and plan ahead to ensure working capital availability.
Sufficient working capital is vital for the business to grow and run smoothly. Depending on the market scenario and cash flow position, decide if a working capital loan would help.
From Working Capital Demand Loans (WCDL) to Channel Financing, there are several opportunities to access working capital funds to supplement cash reserves. Our working capital experts can provide companies with proper guidance to choose the best form of financing to meet business requirements.
Additional Read: Five ways working capital can work for your business
We live in a challenging new reality where businesses are grappling with uncertainty about the future and the burdens of the past. With disruptions in operations, demand fluctuations, and volatile markets, working capital needs have been impacted in many ways. Now is the time to get your cash flow in control as a strategic priority.
Reach out to Tata Capital to know more about how we are supporting businesses through our innovative working capital offerings.
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