Introduction to Working Capital Cycle Management
You being the business owner. your power of execution can be seen in how many working capital cycles you can make it happen. The higher the number of working capital cycles, the higher the churning, the lower the indirect cost (fixed cost may remain proportionate) and the lower the cost higher the margin levels.
You being the owner, hence, you need to push all the stakeholders in one direction where you can move the working capital cycle faster and better.
Accelerate Your Business Growth with Efficient Working Capital Management
Generally, the working capital cycle varies from industry to industry. The working capital cycle for the manufacturing and service industry may be around 30-90 days and for the trading industry, it may be for around a day only. So shorter the working capital, the better the churning of the funds and the better the churning, the higher the margin in the business.
Nowadays getting work orders may be easy but delivery on time is tough and may get tougher every day. And one of the many reasons for it is the working capital arrangement. Most of the time, instead of using your bank credit facility, your customer wants to use your credit facility with the bank. So keeping a close eye on working capital is one of the important parts of financial management.
Learn Effective Management of Working Capital Cycle from the Insights, here.
Factors Impacting Your Working Capital
1) Convenient and clear Payment Terms
You should have a very clear understanding of the payment terms with your customer. Because you’re also a customer for your suppliers.
In a scenario, where you misunderstood your payment terms with your customer, it will not only impact your working capital cycle but also impact your supplier’s working capital cycle. Your debtors will pay you late, so you may pay late to your suppliers.
2) Understand Your working capital supporters
Let’s say you have a working capital limit of Rs. 5 cr from your banker and the available facility is getting exhausted with your existing work orders, then you should be very careful while taking the new orders. There are multiple ways to deal with this scenario.
- First, you can ask your existing customers if they can pay you early. If yes, you can use these funds to procure the material for a new order.
- Second, you can check with your existing bankers, if they can enhance your working capital limit (this may be time taking part).
- Third, check with your creditors, if they can allow an extra credit period.
- Fourth, You can also explore if you can get some advance (proportionate to
your raw material purchase) for a new order and the remaining can be paid on a milestone basis.
3) Long-term association with all stakeholders
This is a very important aspect. Choose all the stakeholders wisely and stay with them for a long time. Including your raw material suppliers to your daily utility supplier.
Over the period these suppliers/stakeholders know you and your business well. And once they get confidence in you (as a promoter) and your business, these stakeholders stand by your side in tough times. While raising the funds, we have seen many businesses rebuild their business only because their stakeholders supported them in the tough times.
4) Delivery Time
India has two major reasons to compete with China – faster delivery time and economies of scale. Due to these two factors, Indian manufacturers cannot sell cheaply. In most cases, the credit period starts after the delivery of the products. So faster delivery will help you reduce your working capital.
You can also understand that – due to better road quality, there has been a significant increase in the last-mile delivery of products. This will be applicable only for manufacturing and trading
Learn the working capital cycle for manufacturing business, Here.
5) Short on Debtors and Long on Creditors -
We’re not suggesting you squeeze your creditors, but you can always check if you can get an extended credit period from your suppliers. and faster payment from your creditors.
6) Timely Payment
Keeping your word is always important. This should always be your moral obligation. You can ask your borrowers for an extension, but ensure the payment is not delayed by a day.
This helps you gain the confidence of a “person of words”. This helps in developing and maintaining smooth relationships with all your suppliers.
Apply for Working Capital Finance at ease, Here.
Conclusion
Effectively managing working capital is crucial for maintaining a healthy cash flow, optimizing margins, and ensuring the smooth operation of your business. By understanding key factors such as payment terms, stakeholder relationships, and timely deliveries, you can navigate the complexities of the working capital cycle management and position your business for sustained success.
At Terkar Capital, we specialize in helping businesses facilitate working capital solutions tailored to unique needs. Our expertise and customized approach ensure that you have the financial support necessary to thrive in today’s competitive market. So, Let Terkar Capital work with you to achieve optimal working capital cycle management and propel your business growth.
Dive deep into working capital here
