As a business owner, you will likely find yourselves tossing up two options – effectively handling your working capital or focusing on growth. As you would already know – BOTH ARE CRUCIAL. If you take your eyes off one and focus on the other, it would prove to be disastrous for your company.
What is working capital management?
The formula for working capital management is [Current Assets] minus [Current Liabilities]. The key components are cash, inventory, accounts receivable, and accounts payable. A positive working capital shows that the company is in a healthy financial position with enough assets available to pay off its immediate liabilities. And a negative one obviously shows signs of danger.
Why is it important for your business?
Working capital management is one of the key measures of financial stability. Here are some of the reasons why you as a business owner, should have an eye on your working capital, all the time.
1. Ensuring Liquidity
Working capital management ensures that your company has sufficient liquidity to meet its short-term obligations. Adequate cash flow, efficient inventory management, and timely accounts receivable collections are vital components. Liquidity ensures a company can pay its debts, invest in opportunities, and weather unexpected financial challenges.
2. Optimizing Operations
Efficient working capital management streamlines operations by minimizing excess inventory, reducing the cash flow cycle, and enhancing vendor relationships. It enables you to operate smoothly, respond swiftly to market demands, and reduce costs associated with excess inventory or emergency financing.
3. Enhancing Creditworthiness
Well-managed working capital reflects positively on a company’s creditworthiness. Lenders and investors often evaluate a company’s liquidity position before extending credit or investing capital. A strong working capital position indicates financial stability and reliability, making it easier to secure favorable loan terms and attract potential investors.
In short, whether you are trying to keep your company stable, or trying to grow rapidly, you cannot ignore working capital management.
If you need help with optimizing your working capital and ensuring that you have adequate liquidity and flexibility, reach out to Finavi CFO for expert assistance. We have over 15 years of experience in assisting organizations with Working Capital Management, driving them toward profitable growth and a more robust financial practice.
Growth – Essential for your company to move forward
While working capital management ensures that your daily operations are taken care of, growth involves a company’s expansion, diversification, and increasing market share. While both are essential for a profitable business, finding the right balance between managing working capital effectively and fueling growth is the key to a successful organization.
How can you grow your business?
There are several methods you can use to grow your business. Some of the common options are listed below, but your methods would be entirely dependent on your product or services, target customers, and your areas of focus.
Expanding your market
You can expand your market by entering new cities, states, or countries; broadening your customer base to reach a new set of customers, or offering new products and services to broaden your target market. Most of these strategies need substantial capital expenditure in new infrastructure, market research, marketing, and sales.
At the same time, you also reap significant benefits like first-mover advantage, market dominance, increased customer base, and increased revenues.
Investing in Innovation and Technology
You can grow your business by investing in new technology – applications that provide you with more information, apps that can attract new customers, and revolutionary technologies that can automate your business. Adopting new technologies can improve your product or service quality, bring down costs in the long run, as well as enhance overall efficiency.
Attracting top talent
In any industry, there would be experts who can bring in 10x growth to your business with their knowledge, expertise, sales-savviness, and connections. Hiring and retaining the right talent can help you set up new teams, improve the efficiency of existing teams, and scale up quickly.
Investing in your employees – their training, mentoring, and providing stock options can help increase productivity and profitability.
As you can see, all these methods involve significant capital expenses which would be difficult for an organization to spare from their running expenses. So what would you do to generate funds?
How do you generate funds for growing your business?
Generating funds can be a challenging task for small and medium businesses in India. Here are some of the most commonly used funding mechanisms.
When the amount required is not too big, you can always approach your bank for an overdraft or a loan, which is usually approved based on your creditworthiness, years of association with the bank, and any guarantees you can provide.
Angel investments are booming in India these days, with many small networks of angel investors scouting the market for startups that they can invest in. Angel investments are usually made in exchange for equity allocation, or convertible debts. The additional benefit here is that investors bring in funds as well as a wealth of expertise and experience in your market.
Venture capital funds
If your fund requirements are substantial, venture capital funds could be the best option for you. Most venture capital funding is for large amounts and is given in exchange for a large stake in your organization, possibly even a majority stake. These venture capitalists would also have a say in major decisions that guide your company.
Going public is a dream for any business as it increases the trustworthiness and credibility of your company. Though it comes with increased accountability and more compliances to be met, the stock market adventure will benefit your company in the long run.
How to strike a balance between working capital management and growth?
As we have mentioned earlier, it is essential to strike the right balance between working capital management and growth. If you focus too much on working capital management and daily operations, your company might stagnate without making use of potential opportunities for growth. If you have your eyes only on growth, it can lead to a waste of money in regular operations and also put undue pressure on the performance of your organization.
So how do you manage this balance delicately?
Managing your working capital well and generating funds for growth is a delicate dance of having your priorities right, accurate planning and forecasting, as well as regular monitoring.
Accurate planning and forecasting
Allocate a certain proportion of time and resources you would dedicate to working capital management and growth at the beginning of the year and follow it rigorously. During certain times of the year, when your business wanes, you can focus on exploring growth opportunities.
Bring in experts to handle certain aspects of your finance
Finance does not come naturally to many business owners, and hence it gets ignored most of the time. Bringing in an expert to handle crucial aspects of your business, like working capital management, can free up your time and headspace to focus on business growth.
Finavi CFO has over 15 years of experience in enabling small businesses to optimize their finance functions, by optimizing working capital, and also procuring required funds for growth. Reach out to us if you would like help with optimizing your working capital, while ensuring growth.
Continuous Monitoring and Analysis
All strategies of your organization should be aligned with your business objectives and KPIs. They also have to be tracked regularly to monitor if your strategic initiatives are helping you to achieve your objectives. It is easy to start a lot of new initiatives. But if you do not keep a close eye on them, it is easy to get side-tracked.
So monitor your working capital, operations, and growth strategies closely to ensure that they are taking you in the right direction. Real-time data that is readily available to you, is the most crucial aspect of this monitoring and analysis.
Hope these tips will help you strike the right balance between working capital management and growth strategies. A holistic approach where you allocate time and resources efficiently for regular operations and debt management will help you keep your eyes open for growth opportunities. Taking advantage of them before your competitors can even see it, is the best possible outcome for any business. Reach out to Finavi CFO if you need guidance on striking the right balance between working capital management and growth.