How to Grow and Maintain Sufficient Supply of Working Capital in Business
If you are working in a collections team under receivable department of any company then you might be aware about the importance of adequate supply of working capital in a business. In this article i will let you know few tips to ensure smooth management of working capital. Let's get started.
Meaning of Working Capital
- People
- Process &
- Physical Evidence (Use or Right Tools)
People
It refers to the team of professionals who are the core part of collection process. This team is responsible for making direct calls to customers for making payments and issuing them the receipts of payment. The team must be equipped with excellent interpersonal or communication skills to recover the due amount and resolving the issues pertaining to any point.
Process
It refers to defining the path of collection or sometimes it is also referred as modes of payment. The process of collecting payments must be convenient and optimised. It shouldn't be hectic or confusing. For example, if a customer is ready to make immediate payment electronically- thru NEFT or PayPal but unfortunately the company declines to accept the payment because it doesn't facilitates the payments in any mode except the Bank-Cheque or Bank-Draft facility, then it will deteriorate the customer experience and the entire collection process. Companies like Tesla, Starbucks and PayPal has started the acceptence of various cryptocurrency as a medium of exchange at their outlets.
Physical Evidence (Use of Right Tools)
It includes the use of right tools such as ERP systems instead of mannual bookkeeping records which help the businesses to track and save the expenses, thereby maintaining the records in a systematic form. Apart from the above 3Ps, a collection manager can keep a constant check on following pin-points to maintain sound liquidity in the business:
- Speed up the collection process from different customers. Reduce the credit sale period and give cash discounts to attract immediate collections.
- Replace the cash purchases with credit purchases and try to increase the length of credit buying period. It will help you to improve the current liquidity position of the company.
- Try to ask for trade discounts from suppliers so that you can pay less for the same number of quantity purchased.
- Start making savings with small amount from your monthly earnings and invest them in large cap companies into financial markets. You can start withdrawing 10th part from your monthly earnings in the beginning and increase with time. For ex. If you save 5000 or 3000 per month then you can save 60000 or 36000 a year. It can also be used to set off any contingency liability which may arise suddenly anytime, such as penalties in any law suit etc.
- Offer non-monetary or indirect benefits to B2B customers, like reimburse the freight outward expenses by making their consignment paid from the place of supply. You can also provide them additional appreciation letters based on their historical performance so that it can create a intangible value in them and made them loyal to customers.
- Start reminding the debtors/customers before the 5-10 dates of their due date, so that they can arrange the funds in proper time.
- Try to convert the doubtful debts into rightful non-debts by taking firm Decisions. Start using the right tools to diagnose the gap in any process and try to bridge the same using data-driven analysis. For example: The process of recruitment can be automated using Ai tools instead of hiring fresh HR Coordinators in the team. For example: Byju's an EdTech company is using a Robotic system in the form of pre-recorded calls to perform the initial functions of recruitment process and only the final selection is done by real HR manager based on the inputs received over the call.
Hence, These were the basic but very important points that can be followed by any business organisation during its day to day activities. This question can also be asked by the prospective employers at the time of interview. So, being a manager or an employee working with collections team — you should act proactively when the company faces acute shortage of adequate supply of working capital by making a check on liquidity ratios, such as Quick Ratio, Current Ratio and the Operating Cash Flow Ratio. These ratios can be used as a tool of measuring financial soundness of a business in short run to pay off its current liabilities in time. I will be discussing about each ratio in my upcoming articles soon.
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