The availability of adequate working capital is probably one of the most critical aspects of running a business smoothly and successfully. Also known as current capital, it is essential to pay for the day-to-day operations of a company; current capital is required to pay for raw materials, salaries, overhead expenses, and various other projected and sudden costs.
The simplest formula to fill out the void of current capital of a business is to maintain positive working capital to turnover ratio. There should be enough funds available at all times to meet short-term requirements, without straining the organisation’s savings.
There are several ways how an organisation can fulfil the deficiency in their working capital. Let’s take a look at a few of them.
- Reducing fixed and variable expenses
Managing fixed and variable costs is an excellent method to mitigate any deficiency in an organisation’s current capital. Carefully considering all the avenues of expenditures will allow you to identify wasteful assets. Removing those will free more funding for the primary operation, provide more liquidity, and ensure your business never runs out of working capital.
- Avoid utilising working capital for purchasing fixed assets
Purchasing assets like equipment, manufacturing facilities, etc. should not be funded with an organisation’s current capital. It can interrupt everyday operations and thwart the stream of revenue to cause financial harm.
Instead, avail a working capital finance for construction and procurement of high-cost expenses like infrastructure, machinery, equipment, etc. These credits come with several borrower-friendly features like flexible repayment tenors, large loan amounts, zero collateral, transparent policies, etc.
- Manage existing inventory
Overstocking on inventory and not financing fixed assets can leave a severe gap in an organisation’s working capital. Companies can minimise warehousing time, refinance existing assets like manufacturing equipment to generate working capital.
- Manage the inflow and outflow of funding
The working capital turnover ratio can be significantly improved if an organisation appropriately manages the inflow and outflow of cash. For example, you can incentivise receivables to prevent accumulation of due accounts. Introducing an automated receivable and payment monitoring system will also help you keep track of the payments and revenues.
Similarly, ensure that you meet all your debt obligations, scrutinise payable interests, resolve any dispute with a customer or a vendor to optimise your company’s cash outflow. You can also take advantage of tax benefits like input tax credits under the Goods and Services Tax. The impact of GST on working capital of business has opened several avenues for SMEs or MSMEs to benefit.
- Streamline monthly expenses
One of the most potent ways to maintain high working capital turnover ratio is to streamline your business’ monthly expenses. Concentrate on recurring expenses as even a small reduction can add up to a significant amount over an extended period. Utilise available resources and train existing staff instead of hiring skilled workforce for precision works, and you will save a considerable amount to invest back into your company’s operational capital.
These are 5 of the most effective methods companies can employ to fill the deficiency of current capital. You can also avail a business loan to boost your organisation’s working capital and create a contingency fund.