New-age techniques for Working Capital Management

Working capital management is part and parcel of every business. A business should effectively collect its dues from customers and pay its supplier on time. Mismanagement of working capital may deteriorate its relationships with various parties, and the company risks losing its credibility. Hence, working capital management is crucial for every business.

In this article, we will discuss how a business can effectively manage its working capital, thereby reducing every impact of unforeseen hindrances.

1. Central Government Incentives/Schemes

The Central Government has launched several schemes to support businesses in their working capital management. These schemes are as follows:

a) Loan in 59 minutes initiative:

Under this scheme, Micro Small and Medium Enterprises (MSMEs) can obtain loan approval within 59 minutes. Funds will be disbursed to MSMEs within 8 to 10 working days.

b) Mudra Loan schemes:

These schemes are specially meant for non-corporate small and micro enterprises (SMEs). The scheme’s objective is to provide funding to these enterprises and support them through refinance arrangements.

c) Funding by National Small Industries Corporation (NSIC)

NSIC, in collaboration with private and government banks, works towards processing loans faster to MSMEs. NSIC assists these enterprises in completing the loan documentation and following up with the bank.

2. Debtor Factoring

Factoring is a process through which an enterprise can release its funds from receivables by selling them to a factor (e.g. financing company). The factor releases the funds after discounts and fees. Debtor Factoring is a win-win situation for every party involved. The factor has collateral in the form of uncollected receivables, and the enterprise receives funds before being collected from receivables. In this process, the default risk of debtors lies in the factor.

3. Invoice Discounting

This technique is similar to debtor factoring. But, the default risk of the debtor lies on the enterprise and not on the finance company, as funds are remitted in the form of short-term borrowing. Invoice discounting considers invoices from corporations with good credit standing and state and central governments.

4. MSME registration

MSME or Aadhar Udyog registration helps an enterprise release its payment within 45 days from the date of acceptance of goods or services. The entity is also entitled to a specified interest rate if there is any delay in payment from the company.

5. Inventory and creditors management

Inventory is an important part of working capital. Excess inventory-in-hand can reduce liquidity for businesses, while the shortage of inventory can lead to loss of sales. Periodic inventory monitoring is imperative as it can also optimise the storage cost. Optimum and danger levels should be set depending on stock usage to avoid under or overstocking.

Creditor management can improve working capital management. A decrease in average credit days outstanding shows improved performance of the company. This helps companies maintain strong relationships with their suppliers and fetch better purchase rates, discounts, and offers.

6. Debtor management system

Policies to motivate debtors to pay their bills faster can be implemented. An enterprise can provide additional cash discounts, interest or reduction in price for future bills for their debtors if payment is received within a specified period. Enterprises should deliver their invoices electronically and provide easy payment options, such as QR codes on invoices.

7. Usage of Idle Funds

A company should never keep its funds idle. It should invest in highly liquid funds giving interest or dividends and the ease of withdrawing funds when required. The returns help to increase funding for future projects.