Working capital is often the backbone of many businesses, providing cash for daily expenditures, funds for emergencies, and the assurance that daily operations run smoothly. While several financial institutions and government organisations offer working capital loans, it is ultimately up to businesses to manage their working capital efficiently.
This is why ensuring that your business manages working capital efficiently to prevent any shortages and setbacks is essential. In this article, we will discuss the
10 Mistakes to Avoid when Dealing with Working Capital For your Business
1. Neglecting the management of working capital
Working capital is as integral to a business as revenue or operations management. However, many often overlook the working capital management process, leading to cash shortages and insufficient funds for emergencies and short-term liabilities.
In addition to the capital management process, businesses should pay attention to the need for permanent working capital and the importance of net working capital. It is essential for businesses to adopt a more proactive approach to working capital, optimise the timing of payables and receivables, and maintain a strict record of cash flow.
2. Insufficient production planning
Poorly planned production can significantly affect your business.
Entrepreneurs must be able to forecast and plan their production with as much accuracy as possible to prevent overproduction. Unsold products, along with the management and storage of raw materials, incur opportunity costs.
By strictly monitoring and analysing sales forecasts, business owners can correct production and procurement plans based on their current requirements.
3. Paying invoices long before they’re due
While avoiding late payments is essential, it is equally important not to pay invoices too early. Payments should be made as close to the due date as possible. Paying early reduces the amount of working capital available. Not adhering to the due date also makes it difficult to forecast how much working capital will be available during a specific term.
To streamline processes, businesses should ensure that payments are made on time and close to their due dates. However, there may be exceptions to this rule. For example, some suppliers offer discounts for early payments, making early payments beneficial in those cases.
4. Allowing customers to dictate your payment terms
When onboarding new customers, you may have noticed many ask for their preferred payment terms. However, accepting these terms without question can harm your business and working capital.
Firstly, having non-uniform payment terms can create extra work and make management difficult. Additionally, while this practice may save time initially, it can reduce your working capital and make it harder to account for.
Developing standard payment terms across all clients will help you manage your working capital and customers more efficiently. This ensures that your business needs are met. Standard terms can allow for some flexibility, depending on your business requirements. This can be beneficial for customers who wish to negotiate payment terms.
5. Mismanaging inventory
Inventory levels affect your working capital. For example, surplus inventory can tie up working capital by incurring storage, depreciation, and insurance costs.
On the other hand, inadequate inventory can cause losses in sales opportunities or stockouts. Adopting inventory management practices can help your business avoid losses in sales opportunities, excessive storage costs, and working capital.
For example, finding a suitable inventory management software can help streamline your operations.
6. Relying heavily on working capital business loans
Working capital loans for small businesses are essential assets. They are excellent for short-term financing requirements and provide immediate liquidity. However, relying on them too often can have adverse effects on your business, including high interest rates, borrowing costs, and financial instability.
Instead of relying heavily on working capital business loans, diversifying your financing sources can sustainably support your working capital needs. It is also essential to consider long-term financing options and to maintain good credit and positive relationships with lenders.
7. Overspending
Investing in assets for your business is crucial. However, it is necessary to exercise caution when spending on these assets, as it can significantly impact your available finances. Excessive reductions in working capital can disrupt your business’s regular operations and hinder long-term expansion.
Instead of making impulsive purchases of new machinery, equipment, or other additions, conducting thorough research is essential. This approach will help your business increase revenue while maintaining healthy working capital.
8. Not taking an advance on large orders
Large, one-time orders often require additional funds and preparation, including raw materials, staffing, and machinery. Failing to take advance payments for such orders means using working capital to fund them.
This could lead to a reduction in cash flow, available funds, and delays in processing other orders. Therefore, it is vital to either take advance payments on large orders or secure bank loans.
9. Unplanned expansions
Unplanned expansion can affect your business operations and strain your working capital. It may also force you to borrow funds at higher costs to cover daily operations and any expansion needs.
Instead, planning expansions in advance and ensuring you have sufficient funds will help retain working capital, keep operations running smoothly, and reduce costs.
10. Not optimising accounts payable
Delaying payments to preserve cash can adversely affect credit terms in the future, as well as damage relationships with suppliers. Instead, businesses should focus on optimising their accounts payable, ensuring they are paid on time.
Negotiating favourable payment terms with suppliers can also help your business keep up with payments while maintaining working capital.
In Conclusion
Effectively managing working capital can be difficult. Business owners can take several steps to optimise their business operations and manage working capital. By avoiding common mistakes, maintaining strict records, and availing of small business loans, organisations can achieve their outcomes in a more efficient manner.
To help your business with its working capital requirements, Tata Capital offers business loans with flexible tenures, convenient loan amounts, and easy eligibility. Best of all, you don’t have to run from pillar to post to apply for this loan, instead you can do it from the comfort of your home.
25 November 2024
5 mins read
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