How To Effectively Manage Working Capital During Crisis

The pandemic has severely dented the working capital across the organizations, in particular the Small and Medium Scale Enterprises (SMEs) in India. According to a FICCI survey, almost 80% of organizations reported a decrease in cash flow, and 60% of respondents indicated that their supply chains were affected due to the deadly virus. Given the significance of cash flow in troubled times, companies should come up with a strategy for effective cash management. In doing so, it is important to take a full perspective of the ecosystem as the measures you take will have implications not only for your business, but also for your customers.
A high level of working capital indicates that the company is well-managed and has potential for growth. However, such targets will be difficult to achieve considering the situation. So, here are a few important aspects that businessescan embark upon to manage cash flow efficiently -

• Start a financial exercise: A company needs to begin financial exercise that will show how much capital is required to maintain the operations, how long will itlast, and thefinancing options that are available during crisis.
• Reduce variable costs: The quickest way to protect the outflow of cash during the times of crisis is to reduce the variable costs. Businesses can impose travel bans, restriction on discretionary spending like training and entertainment, and impose hiring freezes. Taking such measures will eliminate wasteful expenses and generate more liquidity.

 

Also Read:Working Capital Loans: What, How, and Where?
 

• Examine capital investment plan: The fluctuations in the cash flow during the times of crisis require changes in long-term capital investment plan. You need to revisit your expansion plans in the light of this uncertain scenario. A company needs to assess what is absolutely essential and what can be put on hold. Furthermore, organizations need to know what investments are required for creating a competitive advantage when the situation return to normal.
• Make an inventory audit: In the times of uncertainty, organizations are at risk of experiencing problems like shortages of raw material and other parts. Therefore, making a thorough audit of the inventory will provide youa fair idea aboutthe supply of stocks. In that case, it is crucial to create a strategy that will help sell the products, especially the perishable ones, quickly in the market to avoid waste andgenerate cash flow.

 
Also Read: For MSMEs, Working Capital Loans Are The Road To Recovery
 

• Improve receivable process: Depending on the situation, organizations may need to come up with fresh ideas to generate faster cash flow from their receivables. For example, companies can reassess the invoicing process to remove inefficiencies that may be delaying the sending of invoices to the debtors. They can speed up the process by using latest technology.
• Explore new market: Businesses also need to discover potential markets if the existing ones are adversely affected during the crisis.For example, a company can diversify its strategy with the available pool of labour and fixed assets to cater to the demand of the customers.
• Select vendors who offer value for money: In times of crisis, see that your vendors offer you attractive discounts. And if that is not feasible, then look for vendors who can offer considerable advantage on extending the deadline for making payments and offer good deal for long-term contracts.
• Scout alternative financing options: A company needs to explore new sources of finance to ensure steady flow of working capital in the times of uncertainty. Rather than depending on the traditional sources of financing, the companies can evaluate new sources of raising funds like asset-based lenders, peer-to-peer lending and retail bonds.

Also Read: 6 strategies to Keep Your Business Afloat during Covid-19
 
To conclude
Every organization, big or small, need to adopt effective working capital management strategy to chart a sustainable growth path. Strengthening the cash flow is the need of the hour to survive and withstand the crisis period.