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.

Demystifying MSME Loans

MSME Loans – Risky and Profitable Business Types

Micro, Small and Medium Enterprises are the largest employment providers in India. Their contribution to overall employment in the country is pegged at 69%. Also, the MSME sector is responsible for almost 45% of the manufacturing industry and drive 40% of our total exports. These are significant numbers, and therefore, the growth of MSMEs has been a priority of successive Indian governments.

However, for growth, the MSMEs need investment, and the readily available source of investment to them is a business loan. Banks and commercial institutions called non-banking finance companies (NBFCs) are the two main providers of business credit for MSMEs in India. An average Indian MSME needs to pass a number of financial litmus tests before it can get an unsecured business loan or a working capital loan.

Financial institutions give priority to businesses which are considered risk-free and profitable. While it can be argued that every business can be prone to risks, there are a few benchmarks which can assuage the lender’s apprehensions.

A Registered Entity

A registered business entity which complies with the laws of the land establishes a trust in your company on the lender’s part. On the other hand, when a business lacks the necessary statutory paperwork, a lender is right to be apprehensive.

Therefore, getting a business registration will not only get you faster loan approvals, but will also remove any doubts about the legitimacy of your enterprise.

Age of Business

The second factor that distinguishes between a risky and profitable business is its age. While a short-term business idea can also be profitable, the lenders usually require at least 6 months of performance reports before sanctioning a business loan or line of credit.

If you are seeking an MSME loan, then it is better to apply for a loan after completing 6 months or more of operations. Another reason to that is because financial institutions place limits on the period within which you can reapply for a loan. For instance, if you are 5 months into the business and your loan application gets rejected, a lender policy may dictate that you can only apply again after 3 months.

That is another reason why you should never apply for multiple loans from multiple lenders at a time.

Credit History and Profitability

The bank or NBFC that provides unsecured business loans will scrutinize your business account statements to assess the risk or profitability of your venture. If you are unable to maintain a consistent cash flow and retain enough cash at bank to meet your liabilities, the lender will put you in the risky category. In case you are making a good profit, the lender will readily offer loan terms.

Also, if you have a steady cash flow and cash at bank but are not repaying your existing loans on time, it will reflect in your business credit history. Such behavior will lower your credit score and increase the risk factor in a lender’s reckoning.

Type of Business

There are certain types of businesses which are considered risky from an investment point of view. For example, dealing in real-estate, jewelry, precious metals, arms and ammunition, crackers, and other perishable goods involve a high risk-to-return ratio and therefore, given lower preference by a lending firm or bank.

If your business falls into the high-risk category, make sure that you have a solid financial report card to get a business loan.

Getting an MSME Loan for your business

A non-banking financial company is more likely to offer better loan terms for a business because of its in-depth scrutiny and flexible policies towards MSMEs. Lendingkart, a leading NBFC lender in India, offers business loans with customized interest rates along with a flexible EMI schedule.

To know more, visit www.lendingkart.com