Business owners are often too encumbered with activities revolving around their business, as a result of which they hardly have any time in hand for managing cash flows or keeping a close eye on the company’s finances. On the other hand, mismanagement of working capital can wreak havoc on any business. Even businesses with the brightest of ideas have fallen flat on their faces, simply due to inefficient management of working capital. Additionally, certain hidden costs or expenses have an adverse impact on cash flows, further worsening the situation for several enterprises. Here are some of the common mistakes one can avoid when managing working capital:
Don’t overspend or indulge
Let’s say for example, you own a leather belt manufacturing company. After looking at current trends, you find out about a machine that will make you more productive and you quickly end up investing in these machines. While it is a good idea to improve your products, acting purely on impulses will have a depleting effect on your working capital. Instead of making rash purchases based on trends, it is advisable to devote some time to study how a new machine, equipment or addition will enhance your revenues. Study the market thoroughly and only then invest in such add-ons, even if you are availing of a working capital loan. That will help you retain working capital for other necessary expenses.
Don’t utilize all your working capital
If we continue with the same example, say your manufacturing unit is faced with an urgent export order and to fulfil that, you decide to hire specialized designers and invest in an expensive leather pigment dye too. While you need funds for these purposes, you must also not overlook the fact that paying for them will completely deplete your working capital. It can rather be used for other expenses like salaries, electricity and rent. If you are on the lookout for MSME Finance, you can check out NBFCs. It offers benefits such as minimal documentation, quick approval within 24 hours and low business loan interest rates. You can avail a maximum amount of Rs. 30 lakhs for the growth and expansion of your small or medium-scale business. To get instant funding, check your pre-approved offer here.
Don’t maintain excessive inventory
Say you get an order of 10,000 units of leather bags and to cater to that, you buy raw materials suited to manufacture 50,000 units. Given that in any line of business, the material parameters vary considerably from one client to the other, you cannot possibly use this excess raw material until you receive a similar order. So, for the time being, you end up overspending your capital on excess materials and will also spend on maintaining the same. Rather, it is better to buy this inventory in instalments so that your working capital does not get blocked. Properly managing working capital is very important.
Don’t neglect timely collection of payments
It goes without saying that to keep your business running and to fulfil essential costs, payments are vital. Do the needful to disallow clients from making late payments. Be very thorough with your payment policies and offer easy payment options like net banking, digital wallet payments, and credit card machines to your customers. The faster you get payments, the quicker your working capital will be replenished.
The bottom-line is that having a well laid-out financial plan is essential. This is one that estimates or provides for all kinds of costs, be it exigencies, contingencies, etc. That way, as the owner, you will be prepared for all kinds of situations and not fall prey to working capital overruns.