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5 strategies to effectively manage your working capital

Updated on :  

08 min read.

Working capital indicates the efficiency of a company’s operations and how financially stable the company is. Positive working capital helps an enterprise meet its short-term obligations, improve its creditworthiness, and fund its growth. Effective working capital management is the key to success for any organisation.

Here are five strategies to effectively manage your enterprise’s working capital:

  • Manage procurement and inventory efficiently: Inventory is one of the most critical components of a business’s working capital, but the efficient management of inventory is sometimes neglected. While the inventory shortage leads to lost revenue opportunities, hoarding too much inventory blocks capital. This is why inventories need to be closely monitored. A subset of overall inventory management also includes an enterprise’s focus on reducing its slow-moving inventory and increasing its inventory turnover cycle. From a working capital perspective, every business should optimise its inventory by analysing past and present performance metrics and implementing inventory management processes. Digitising this function could help identify key trends, forecast demand, and make more precise ordering decisions.
  • Improve receivables management: Another strategy to improve working capital is to keep the sales to cash cycle as short as possible. Reassessing contracts and credit terms from time to time will ensure that you do not give debtors a larger than the necessary window to settle dues for goods and services. Another major challenge enterprises face bad debts. To reduce bad debts, enterprises should implement rigorous credit checks. Bringing technology to automate the accounts receivables process can shorten the receivables period through faster invoice processing and collections. It could also facilitate automated, timely reminders and potentially reduce bad debts. Businesses should also use digital supply chain financing options like invoice discounting and factoring, as they offer quick cash conversion at meagre costs.
  • Automate input tax credit claims, and GST returns filing: While indirect tax compliance did not affect a business’s working capital in the past, now businesses find their working capital blocked due to the tight restrictions surrounding input tax credit (ITC). The government has recently amended the Goods and Services Tax (GST) law to ensure that a business can claim ITC only if the same is reflected in their GSTR-2B statement. This puts increased pressure on enterprises to reconcile their input tax credit carefully and frequently and communicate any missing information to their supplier. Given the tight restrictions on ITC claims and the effect on working capital, every enterprise should look at automating their GST return filing and input tax credit claims process. Automation guarantees the accuracy, and if ITC claims are not 100% accurate, then besides working capital taking a hit, a business could also be liable to interest, penalties, and demand notices.
  • Automate vendor communication and vendor payments: Maintaining a strong relationship with vendors typically results in a better quality of products supplied, higher discounts, and more favourable credit terms. At the same time, every enterprise needs to ensure payment discipline and ensure that their suppliers are paid on time. Automating the vendor management function helps streamline all vendor-related processes such as onboarding, invoice processing, communication and coordination, and payment management. Further, with the stringent input tax credit rules imposed, the dependency on vendors to upload invoices on time has increased manifold. When a vendor does not upload invoices on time, an enterprise cannot claim ITC, which hits the enterprise’s working capital. Withholding payments in such a case might push vendors to upload invoices. However, it is not possible to track each invoice manually. Hence, automating the vendor management process serves a two-fold purpose.
  • Use real-time data analytics to detect anomalies: Business leaders can make financially viable decisions only if they have the relevant information at hand. Gone are the days of month-end and year-end reporting. Now, every business leader wants access to reports and metrics on tap. Every enterprise should implement a system of real-time reporting and data analytics that provides the necessary financial visibility to implement and monitor a working capital strategy. Data visualisation not only helps monitor performance but indicates areas of profitability, highlights trends, and flags discrepancies even before they become issues.

This article is the third in the series ‘Understanding the facets of working capital management’.

Read next – How does Clear help in working capital management?