Master Working Capital Cycle Management for Business Success

 

Introduction to Working Capital Cycle Management

As a business owner, strategic working capital cycle management is crucial. Your ability to effectively navigate multiple working capital cycles demonstrates your execution power. The more working capital cycles you can complete, the higher the churn, leading to lower indirect costs (with fixed costs remaining proportional) and increased margins.

To achieve this, it is essential to align all stakeholders towards the common goal of accelerating and optimizing the working capital cycle. By doing so, you can enhance efficiency, reduce costs, and boost profitability.

Understanding the Working Capital Cycle

Generally, the working capital cycle varies from industry to industry.  For the manufacturing and service industry may be around 30-90 days; for the trading industry, it may be around a day only. So shorter the working capital better the churning of the funds and the churning higher the margin in the business.

Explore the working capital cycle in service business here

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 customers because you’re also a customer of 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) 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.

3) 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.

4) 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.

5) 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.

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 a time-consuming 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.

Many other factors need to be considered – some of which are industry-specific and some of which are company-specific. But you should know your working capital cycle well set some rules and follow them.

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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 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 in achieving optimal working capital cycle management and propel your business growth.