Working capital management is a benchmark for businesses, with especially Startups and SMEs struggling to find the balance. It is an essential metric in measuring the long-term financial health of a business. Working capital management involves a business strategy that ensures the operational efficiency of a company by monitoring and using current assets and current liabilities effectively. This means that maintaining a positive working capital can pay its bills and invest in growth opportunities. Finance teams work relentlessly to work on striking the right balance for working capital. Here is a list of industry best practices: 4 tips for startups and SMEs to manage working capital efficiently.
Inventory management is an important factor in making the most of working capital. Inventories can pose an excessive burden and lock cash resources. However, maintaining an insufficient inventory may result in loss of business opportunities. The goal of any business should be to manage optimum inventory levels, to avoid procurement costs, storage costs and cost of insurance. Invest in forecasting the true demand, and optimize logistics, warehousing, and safety stocks.
Vendor payments are the payments to external suppliers and vendors for goods and services provided to the organization. Vendor payment compliance is one of the key factors in improving working capital. It’s vital for businesses to improve payables performance for maintaining healthy relationships and negotiating deals and discounts for bulk buying in the future, if need be. Although vendor payments seem counter intuitive to maintaining working capital, maintaining a high reputation is likely to save up cash in the longer run.
Optimizing the accounts receivable function can help free up cash and further improve working capital. Invoicing and billing plays a major part in improving the overall process. One way to achieve process optimization is to automate the process – reducing the time and effort required, and eliminating the risk of human errors. Moreover, electronic billing systems are able to significantly reduce the delivery time for invoices.
Carrying overdue accounts receivable and passing over payment terms result in a loss of growth opportunities that your business can essentially invest in.
Managing payables and receivables effectively directly shortens the cash conversion cycle. The shorter the cash conversion cycle, the better the business is at selling stocks and recovering cash from sales, all while complying with supplier payments. Aside from payables and receivables, the cash conversion cycle can further be reduced by investing in automating the cash collection process. Deloitte recommends implementing a cash collection process to enhance visibility of real time cash flow. This further strengthens the process collection process. Moreover, instant cash to digital conversion further eliminates the time required to make cash resources available for growth and investment opportunities.
Reconciliation and settlement is the basic building block of enterprises. Early stage startups and SMEs lose about 5% to 20% of invested capital as friction in reconciliation and settlements. How so? Over invoicing vendors and often under invoicing receivables causes the startup to quickly burn out cash. Very often, businesses deal with unnoticed frauds and thefts originating from the customer side, as well as from within the business. It is only necessary for businesses to invest in performance enabling operations of an organization. Automating the reconciliation and settlement process eliminates these frictions, reduces the cash burn rate stemming from reconciliation and settlement, and maintains complete transparency for businesses on every end.
Loop’s solutions help Startups and SMEs in managing their working capital, through complete automation and accessibility of cash whenever and wherever needed. Our end-to-end cash management solutions from collections, to tracking and reconciliation – minimizes the cash conversion cycle, reduces excessive cash leakages and helps businesses manage their working capital efficiently. Get in touch with us to get started.
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