Even though India is home to several successful start-ups, a survey suggests that almost 9 out of 10 fail to survive after the first 5 years of operation.
While the lack of innovation is one reason for such failure, another major contributor is improper management of working capital. The same is not only applicable to start-ups but also for small and medium enterprises.
Tracking returns on working capital
Entrepreneurs are advised to track their cash flow every month. This ensures the business does not miss out on the predictive analysis of potential problems associated with daily expenses.
This can be especially beneficial for companies that require high working capital. A more accurate portrayal of the entire year’s financial performance at the end of a fiscal can also be quite resourceful.
Follow up on days sales outstanding
Days sales outstanding (DSO) is an average measurement of the number of days required by a company to collect payment from the buyer. Liquid funds are an essential factor in daily business transactions.
Following up on sales can enable you to collect your receivables and invest it back into the working capital cycle much more quickly. Entrepreneurs can even use this prediction to plan future investments and to maximise their business turnover.
Nonetheless, there could be an instance where you are unable to follow up on your sales, or the client fails to pay on time. In such cases, you can avail a business loan to make up for the deficit in funds and maintain your operations.
Maintain a positive turnover ratio
The working capital turnover ratio determines the efficiency with which a company handles its capital with respect to annual sales. It is the ratio between operational costs and generating revenue.
While businesses are advised to maintain a positive ratio, an overtly positive figure can prove to affect its growth.
A higher ratio ensures the company has enough funds to spend in any aspect of the business such as expansion, increased inventories, etc. However, a ratio of over 80% could mean that that organisation does not have sufficient funds to invest in sales growth.
Businessmen are advised to keenly monitor their working capital ratio. This ensures they are efficient at handling the company’s short-term liabilities and assets to support sales growth.
Keep note of past due invoices
Keeping a record of your past due to invoices can help you track down clients who are usually late with their payments. This information can help you create measures to address such customers. You can also construct proper follow-up measures accordingly, asking specific clients for timely payments.
Minimise the number of days required to clear stock
Day sales of inventory or days inventory outstanding denote the average time needed by a company to sell or utilise its stocks. A lower number is a sign of efficiency. It means that the organisation can sell off its stock reasonably quickly.
This ensures a better supply of daily working funds, which can lead to rapid and increased turnovers in the future. In plays a vital role in the life cycle of the working capital cycle. It also allows entrepreneurs to judge the relevancy of the inventory based on how long it takes to utilise it and make more optimised investments in the future.
Improve the day payable outstanding (DPO)
A company requires a certain period to pay off its debts to creditors, such as vendors, suppliers and other businesses. Day payable is the ratio which denotes the average time required to complete this task.
A company can avail any of the several types of business loans to improve this ratio. This not only optimises cash flow for better investment opportunities but ensures better trade relations as well.
Several financial institutions offer such loans on borrower-friendly terms. In addition to the facilities provided by such top lenders, Bajaj Finserv also provides pre-approved offers that make the process of availing loans hassle-free. These offers are available across various financial products such as personal loans, business loans, etc.
Working capital is one of the many factors that can contribute to increased turnovers. Entrepreneurs can also concentrate on other factors such as targeted approach, better lead generation and client profiling to ensure a consistently growing source of revenue in the future.