Cash is King: How to manage Working Capital during Downturn
Working capital is the amount of capital needed to run a business and is calculated as Current Assets – Current Liabilities. Coronavirus lockdown has led to a drop in demand for goods and services. At a time like this business owners need to do an in-depth analysis of their cash requirements for efficient working capital management.
We get you 5 important steps for efficient working capital management during the Coronavirus downturn:
1. Operating Expenses Breakdown
There are 3 types of costs that you need to analyze:
- Direct Costs- Costs that directly impact or are related to revenue.
- Indirect Costs- Costs which are not directly related to the product or service but would be supporting costs to keep the business functioning. For e.g. marketing costs, office supplies, local travel etc.
- Salary- Cost of employees working for the organization.
A proportionate cut down on indirect costs can help prevent the extra cash outflow. For e.g. spends on marketing can be put on hold or any IT related expansion can be deferred till the situation and revenue become better.
Cash conserving measures become the need of the hour
Important Lesson
Businesses need a positive working capital and cash flow to grow their companies. During a downturn they can still grow or remain afloat if they have access to enough working capital or have assets in cash or cash equivalents.
2. Inventory Management
- Focus on reducing or finishing stocks.
- During Coronavirus outbreak companies are getting stuck with large inventories as the customer is not buying the way he used to.
- Instead of blocking your cash in procuring more inventories, try to reduce the number of times the product is stocked till it meets the consumers buying pattern and working capital management is not affected.
3. Look at working with multiple suppliers
- During a downturn, businesses are sometimes not able to provide the product or service to the customer due to lack of adequate supply.
- Look for additional suppliers so that you can source similar products.
- Multiple suppliers will help in a price competition between the vendors and will help in bringing down your supply chain cost
4. Keep a lookout for alternate financing sources
- During a downturn in the market, you can assume working capital requirements for your business will increase as customers will take longer to pay for goods and services.
- Check the availability of your usual credit lines.
- If you have a line of credit, consider taking the funds before and keep it in a separate account. In this case, this cash will be available if more working capital need arises.
5. Discontinue non-profitable Products and Services
- Products that are sucking cash out of the business should be stopped immediately for reduction in working capital management.
- Entrepreneurs can look at what products can be made using a ‘pull’ system which means avoid wastage in the production process, what can be produced on made-to-order basis and what should not be produced at all.
A lot of entrepreneurs only have their local chartered accountants taking care of accounts or they hire young account executives to do the same. This is to save cost. In times of a downturn, entrepreneurs must take consulting from finance experts that have seen similar situations in life and can help you make quick and efficient decisions.
In downturns, entrepreneurs must divide their working capital decisions in two parts:
1. Tactical
2. Strategic
Tactical decisions are the one’s that you will implement in the short term. That is, in the net 30 – 90 days.
Strategic decisions are the one’s that you will implement in their long term. That is, in the next 2-4 years.
Only those companies will survive the Coronavirus downturn and bounce back that understand working capital management. They need to keep a close account of how much cash is there within the company and how to use it judiciously.
To know more about how to manage working capital for your business, subscribe to the online problem-solving course on working capital management available in the Bada Business Mobile app.