Reasons Why You Might Be Failing At Working Capital Management

Small and medium enterprises are particularly vulnerable to improper management of their assets and liabilities. Most SME assets are in the form of current assets and their current liabilities are often a source of external finance, given the difficulties of getting a business loan for such enterprises. Oftentimes, SMEs have to resort to vendor financing when facing a capital crunch. Therefore, efficient working capital management becomes critical for the success of a small business in India.

Working capital is the difference between your current assets and current liabilities. It is primarily used for supporting the day to day financial operations, such as the purchase of stock, salary and wage payments, and financing credit sales. In essence, working capital is the lifeblood of a business.

Working capital management is the managerial strategy for creating a balance between the two aspects of working capital i.e. current assets and current liabilities. Working capital management ensures that there is enough cash flow for meeting short-term debt and operating expenses. Efficient management of working capital is a part of effective corporate strategies and helps in creating shareholder value. However, maintaining the liquidity of a firm is also an important part of working capital management as increasing profits at the cost of liquidity can also have serious ramifications for an SME. In case, profits are ignored, a firm cannot conduct operations for long, and if liquidity is ignored, the firm may face insolvency. So, working capital management should be given due consideration in strategic management of a company.

If your cash flow is constantly at odds with your working capital requirements, the reason might be a de-synchronization between one or more of working capital determinants. Here is a list of working capital determinants / reasons why your firm is struggling to acquire the necessary working capital buffer for operational expenses and short-term debt obligations.

Nature of business:

The type of business your company is involved in does have an impact on your overall working capital requirements. For example, trading and investment firms very little capital in form of fixed assets but do require larger working capital funds for operation. On the other hand, firms offering public utilities do not have a huge working capital requirement but do need to invest in fixed assets. So, the first thing you need to check is whether the nature of your business is properly aligned with your financial policy for generating the working capital.

Sales and demand:

Working capital also has a relationship with the volume of sales. Again, this relationship varies based on the type of your business but in most cases requires the deployment of fixed assets to spur growth. So, if yours is a growing enterprise, make plans in advance for a continuous change in working capital needs – and how you are going to meet them – as per the existing sales and demand scenario.

Manufacturing technology:

If you are manufacturing products, using the right technology is crucial for better working capital management in your enterprise. Manufacturing has a direct relationship with increase or decrease in working capital funds. The longer the manufacturing cycle, the higher the firm’s working capital requirements. This, pick and choose the right technology to streamline your working capital and manufacturing process.

Credit policy:

If you have a credit policy that differs too much from the norms in your industry, you may find yourself having working capital troubles. It is good to be able to offer better credit terms to your buyers as the part of your customer acquisition strategies, but it is similarly important to limit that flexibility within the constant of industry norms and practices.

Operating efficiency:

Another factor that relates to the delivery of goods and services is the operating efficiency of your business. It has a direct effect on your working capital requirements. Pushing your operating efficiency to the maximum will not only decrease your working capital requirements but also improve your profit margins.

Price Level Changes:

Change in the price of raw materials, packaging for finished goods, transportation and sales costs, can also increase or decrease your working capital requirements. Being able to anticipate and adjust accordingly to these price level changes is a part of effective working capital management. If you are being let down by the volatile price level changes, consider hiring an expert to stabilize your working capital and other financials.

Supplier Credit:

A firm’s working capital requirements are also subject to supplier credit. If your supplier trusts you enough to grant higher credit in lieu of raw or unfinished goods and services, it can reduce your immediate working capital needs. So, cultivate stronger relationships with select suppliers instead of regularly switching from one to other.

Institutional Finance:

Lastly, the type of institute credit available for your business also has an effect on working capital requirements. If you can get business loans easily, your working capital needs will not suffer. But if your business loan applications are continuously being put on hold, it may not bode well for your working capital and cash flow. In such cases, try applying for a business loan with non-banking financial companies offering working capital finance for SMEs. For example, Lendingkart Finance is a FinTech firm that offers business loans up to ₹ 1 crore without any collateral requirements. Lendingkart’s business loan offers include approval and disbursal within 3-days of verification, which makes it instant business loan, faster even then the Indian government’s ‘MSME 59 minutes loan’ offer.

We hope, these pointers for identifying working capital issues will help you manage your organisation better and grow organically. To know more about working capital finance and how you can get small ticket short-term finance for your growing business, email us at info@lendingkart.com or call us on 0124-3864889.

Here’s How to Secure Collateral-free Working Capital Loan up to ₹ 1 Crore

Small business loans are both hard and easy to get. If your business has a verifiable history and you adhere to the tax and policy guidelines laid by the government, then it is easy to secure a business loan. And if, your papers are out of order, then it is a little harder to get one. Still, small business owners who are careful in managing their income and expenditure, and regularly pay due tax, can also find it hard to secure institutional finance in the current economic environment.

The banking sector in India is facing an unprecedented rise in non-performing assets a.k.a. NPAs. This has put pressure on most public and private sector banks to lend prudently. While the additional measures of scrutiny are the need of the hour, they are definitely affecting the investment environment in the country. Also, since the Indian economy is the fastest growing major economy in the world at the moment, a lack of investment doesn’t bode well for small and medium enterprises which contribute over 45% to the GDP growth.

Fortunately, the alternate finance industry has taken the mantle for providing working capital finance for SMEs of India. Non-banking financial companies like Lendingkart Finance are leading traditional banks in terms of funding and nurturing SMEs. There are several benefits of FinTech finance as it is popularly known because of its reliance on Big Data and Internet of Things.

Faster Business Loans: FinTech companies like Lendingkart are offering small business loans with a minimum turnaround time of 72 hours. This has been made possible by switching to online application, documentation and verification of loan requirements. Since, the government has also emphasized digitization in its schemes and policies, it has become easier to verify most of the financial information online.

Unsecured Business Loans: NBFCs are not only offering business loans faster but are also offering them without any collateral i.e. putting an asset up as security for the loan amount. Thus, removing one of the biggest problems faced by small and medium enterprises when applying for a business loan.

Lower Interest Rates: By eliminating manual work hours in loan processing, NBFCs are saving more in terms of operational costs. The benefits of which are then passed on to the borrowers in form of lowered interest rates on small business loans. With a good credit score and healthy balance sheet you can secure a business loan at half the rate of private money lenders.

Flexible Monthly Installments: NBFC loans are also quite business friendly as they offer multiple repayment options in comparison to bank loans which have fixed EMI schedules. For example, Lendingkart Finance gives you an option to repay your business loan in bi-weekly or monthly installments. So, if you are confident of generating revenues faster, you can also repay your loan faster. Otherwise, you can opt for a more relaxed repayment plan.

Waiver of Fees and Charges: Another benefit of FinTech business loans being online is that you pay minimal processing charges. Lendingkart has a processing fee of just 2% to 4% (depending on sanctioned loan amount), which is several notches lower than that of a bank. Furthermore, NBFCs are also waving of prepayment charges / penalties if you decide to repay your loan early.

Renewable Business Loans: A huge benefit of taking a small business loan from an NBFC like Lendingkart is that you can easily renew your sanctioned loan amount upon repayment. So, it is a kind of revolving finance facility that you are getting for managing your working capital.

Credit Score Improvement: Last but not the least, NBFCs also report your transactions to the credit rating agencies, which in turn helps in raising your credit score. So, by getting a small ticket business loan from an NBFC, you are inadvertently opening the doors to larger financial investments for your SME.

Applying for a Business Loan with Lendingkart

Lendingkart is one of the leading business loan providers in India, offering short-term working capital finance up to ₹ 1 crore for SMEs. To get a business loan you simply need to follow the following steps.

Getting your Documents in Order: Before applying for a business loan with Lendingkart, make sure that you have the digital copies of following documents handy.

  • Business registration / incorporation certificate and Company PAN Card
  • Bank account statements of all business-related accounts for the past 1 year
  • Personal / partner / director identification such as Aadhar and PAN Card

Assessing your Loan Requirements: Another thing to keep in mind when applying for a business loan with Lendingkart is that you should do a realistic analysis of your financial needs. Applying for an overly ambitious loan amount may see your application rejected whereas under applying may not fulfill the purpose for which you are taking a business loan.

Improving your Credit Rating: This is a one-off step for companies with a less than ideal credit rating. We recommend that you take steps to improve your credit rating by repaying existing debt and streamlining your finances before applying for a business loan to get the maximum benefit in terms of loan amount sanction and interest rates.

Now that you are ready to apply for a business loan, head over to the Lendingkart website or download the Lendingkart app on your Android or iOS smartphone to create a free loan account. The process for application is fairly straightforward, fill in your business details, loan requirements and upload the aforementioned documents to get an instant business loan quote. The quoted loan amount can be equal to or slightly lower than the requirement you share with us. Choose to accept the loan offer and Lendingkart will start the verification process.

You can easily track your loan application status from your Lendingkart loan account online. If all things check out, Lendingkart will credit the funds to your business account within 3 days of application.

For securing a quick, collateral-free working capital loan from Lendingkart.

Working Capital Management for Small Business Owners

Working Capital Management for Small Business Owners

Any business can have different sources of income and efficient management of the same can work wonders in the running of the business. While startup capital and fixed assets are typically long term, for the day-to-day running of any business, an efficient cash flow structure is necessary. In the light of the same, working capital becomes quite crucial for small business owners.

What is Working Capital Management all about

Working capital management is the relationship between a company’s short term assets and short term liabilities. In simpler terms, it is the way in which a company handles its income generation and expenses. For example, if your company deals in a lot of paperwork and you need prints of documents every second hour, that is an active expense happening almost every day. Getting an office printer would make the expenses considerably less, over the course of time.

Efficient working capital management ensures that any company can run smoothly while being able to repay maturing short-term debt and expenses that might rise in the near future. In working capital management, the most basic tasks revolve around managing inventories, accounts receivable and payable and cash. Inventories in our example can be ink cartridges, blank paper that can be used in the future. While your sales on credit can be a part of accounts receivable, if the printer was bought through a loan, the EMI would be part of the accounts payable. Cash is pretty self-explanatory and is basically used for expenses that can’t happen on credit or are quite diminutive.

Importance of Working Capital Management

Efficient working capital management is an important component of sustainable growth. If a company runs out of money for running its day-to-day expenses, the production of wares and services will eventually stop. In such instance, the business will fail to cater to its existing customers and henceforth fail to acquire new ones as well. To restart production, the company will then tap into the company capital. While this step may offer a temporary respite, it will affect long-term stability by jeopardising asset and equipment acquisition and manintenance. Therefore, it is important to have a working capital management system in place, which can realisitically assess the company’s working capital requirements, hence giving the managers and business owners, enough time to come up with a solution. Working capital management also helps businesses in streamline processes, cutting down sundry expenses and reduce the cases of theft and fraud.

Ways in which Working Capital is used

The importance of cash for companies can never be expressed in enough words. Cash in hand is majorly used for three purposes, namely – Speculation, Precaution and Transaction. All the three are quite pivotal in deciding the growth of a small business.

Speculation

Speculation is the scenario where having appropriate cash in hand can aid in taking benefits of special opportunities related to purchase. Suppose a small business is dealing in fireworks. They would normally have stock left from the past year Diwali in their inventory. Let’s presume the business is paying a monthly fee of INR 20000 for storing its stock in a warehouse. The annual fees come to INR 2.4 lakhs. During September, the business gets an offer to receive an amount of new stock (equal to the old stock) at a seasonal discounted price of INR 1.8 lakhs. Here, the cost of the new inventory is less than the carrying costs of the old stock. But it is actually more profitable for the business since the old stock has a depleted value now along with the carrying cost of 2.4 lakhs. The business will do much better if it purchases the new stock at a discount and disposes the old inventory at a discount to small retailers. That way, the business will be ready for the festive months ahead with a new stock that has a much higher chance of being sold out fast.

Precaution

Precaution is when a business holds cash in hand to safeguard against unforeseen situations. Let’s consider our old example of the small business selling fireworks. Speculating on a booming sale in the festive months ahead, the business had bought in new stock on credit, hoping to settle the dues after the sales are done. But due to some state-wide problems, people didn’t celebrate as much and thus, didn’t buy much fireworks. But the business still has to honor its promise of repaying the dues, so it uses the cash in hand to do that.

Transaction

Transaction is perhaps the simplest of the reasons why small businesses should have access to cash in hand. Every small item needed in a day-to-day operation of a business can’t be settled through online transactions. Cash in hand is required for sundry purchases that are then added up at the month end for the expenses.

Working Capital Finance or Loan

These days, working capital requirements can be met with a working capital loan. The working capital finance industry offers short-term small-ticket loans for small and medium business owners to help them cope with the rigours of workong capital management. Working capital loans also allow business owners in streamlining their finances through flexible EMI schedules, instead of constantly worrying about invoice clearances and various due dates.

Non-banking financial institutions are leading the race when it comes to working capital loans and  financing.  There is a simple reason for this, NBFCs have developed products and services which cater exclusively to the needs of small businesses; meaning, it is easier than ever to apply for a business loan, the verification process is quick and hassle-free, and the loans are approved faster. NBFCs like Lendingkart Finance promise credit of funds within 3 days of loan application submission and verification, and that’s what a small business, struggling with working capital management, needs.

Tips to Improve upon Aspects of Working Capital

Accounts receivables, cash in hand, inventories, marketable securities and prepayments are current assets that will become cash within 12 months and likewise, account payables, wages to be paid and unearned revenues are current liabilities that need to be settled within 12 months of time. Good working capital management involves keeping the current assets consistently higher than the current liabilities to avoid financial complications or operational problems. Here are some small tips that can help you manage your working capital in your company more effectively. Keeping an eye on these can allow your small business to prosper –

1. Take advantage of float – Float or floating capital is basically the difference between book balance and bank balance. Let’s suppose you have dues of INR 3 lakhs to settle by the 31st of October. However, only INR 1 lakh is supposed to be paid by the 5th of October. Considering that you have INR 3 lakhs cash in hand by September 27, you could use INR 2 lakhs as a short-term deposit if you have no other assured profitable short-term business venture that can pay within a month. The return could be less than INR 1000, but it’s better than nothing. If you like investments, you can check the market and invest in equities for a short term for getting better returns, but this is a riskier approach

2. JIT Inventory – Just-In-Time inventory allows a business to cut down on costs involved in storing stock. Materials are purchased and received in time for the production line or for sales. Though this is quite difficult to achieve, if your relationship with the supplier is good, you can manage this effectively

3. Sales on Credit – Here, your sales play a crucial role. The goal is to shorten the amount of time your customers can take to pay their bills. You could offer a period of 30 days till their bill is due and offer a promotion of 3% discount if the same bill is cleared in maybe, 10 days or less. This allows you to sell more in a short time and pushes your customers to pay earlier to get a discount of 3%

4. Alternative Funding – This method can include availing working capital from banks, NBFCs, asset-based lenders, crowdfunding. In most cases, a genuine business idea, long term efficiency and good revenue generation can get you access to alternative funding rather quickly

5. Timely payments to suppliers – This is the easiest and simplest rule to follow. It goes without saying that if you pay your suppliers their dues on time, you can negotiate better deals and get discounts on your purchases

6. Group Purchase – As a small business, you might not always have access to funds to buy stock at a discounted quantity, or you might not have the available storage to accommodate a bulk of material that you get at a discount. It is always a good idea to look for other small businesses in the state or region who do the same trade as you and pool in resources to get the stock from your supplier. That way, you don’t have to spend a lot and still get to avail the discount

7. Learn the benefits of e-procurement – If you are into electronics, electrical equipment, garments, gift items and the like, you can look into sites like mytradebox.com where you could find interesting items with heavy discounts on bulk orders. These can help you source items quickly at very affordable rates

Working Capital Management and your Small Business

Small businesses aren’t much different from regular, established business giants. They just have a smaller market footprint. While larger businesses have to deal with multiple rules and regulations that they have set for themselves, as a small business owner, you will be much more flexible in making changes to the processes that are followed in your business. Taking working capital management seriously and handling the details through which your cash flows are dealt will definitely make your business a more profitable one. This, combined with social media, ecommerce and data science can work wonders for your small business. But those are topics that will have their own articles. Follow our Lendingkart blog to be regularly updated about the same.