It is an undisputed fact that cash is required to run day-to-day business affairs. Working capital is the amount of money a business possesses to meet operational expenditure.
It is calculated as the excess of current assets over current liabilities. The working capital calculation is based on cash, assets that can be liquidated to cash like inventory or receivables, and expenses that will be due within a year.
There are several options for companies to access working capital finance based on their unique needs. However, keeping in mind the disruption caused by the pandemic, the strategies for accessing and employing working capital needs to evolve to meet current market conditions.
Here are some ways you need to rethink your working capital strategies for FY21-22:
Clarity on employment of working capital
The underlying purpose behind any working capital management efforts is to ensure that the business functions smoothly without disruptions. In addition, apt management of working capital ensures optimum utilization of funds available.
To have an effective strategy, entrepreneurs must begin by understanding the current working capital position and factors that might impede future availability or demand additional funds.
For instance, if the business anticipates another lockdown and a dip in the revenue, it needs to conserve cash in the short term for exigencies. Early payments through supply chain financing could help improve liquidity by accessing cash trapped within receivables to mitigate the short-term cash flow requirement. In comparison, if the business expects a gross increase in demand for certain products, it could access Purchase Order financing to employ funds towards increased manufacturing or procurement expenses.
Here, entrepreneurs need to be clear about how the current scenario will impact their working capital position. Having clarity about the most critical areas where working capital needs to be employed in the present context will help plan better.
Think collective and collaborative
Any working capital management strategy must work well for all stakeholders involved. Gone are the days of self-centered businesses. In times of crisis, companies need to support and help each other, and working capital management is no different.
Strategies that create a win-win for everyone in the supply chain work well in the long term. Moreover, they strengthen the supply chain and the business ecosystem. Ensure prompt payments to your suppliers and reasonable credit terms to your customers. If your working capital position is already challenging, tie up with financiers like Tata Capital to structure supply chain solutions that provide breathing room for all parties involved.
Larger corporations can leverage the strength of their balance sheet and make cost-effective financing available to their suppliers. This access to funds also helps improve supplier’s financial health and enables them to offer better pricing to their customers. This financial year, make sure your financing strategies are collaborative and extend as much support as possible to your supply chain partners.
Additional Read: Five ways working capital can work for your business
Technology has been a great enabler in democratizing access to finance. Evaluate how technology can be leveraged effectively to improve cash position and optimize working capital.
Partner with digitally savvy financiers that can support ease in onboarding and transacting. Whether it is applying for a loan, accessing the range of loan options, onboarding, or the entire disbursal process and repayment, technology can make things simple and effective while saving time and money.
The advantages of online financing easily spill over to increased efficiency, higher productivity, and speed in business dealings. Tata Capital’s innovative web and app-based digital platforms facilitate an intuitive and user-friendly customer experience.
Additional Read: How digitization has transformed financial services
Know your options
When it comes to working capital solutions, there is no one-size-fits-all policy. Explore the various working capital solutions available and choose the most suitable offering that fulfills your unique requirements.
Working capital management is all about maintaining a balance between cash, trade receivables, trade payables, operational expenses, and inventory. Make sure to deep dive to know which part of your working capital management needs reinforcement and identify working capital financing accordingly. This planning might sound tedious but can help businesses operate efficiently.
Get in touch with Tata Capital to know more about how you can bridge your working capital gap.