How to deal with longer working capital cycles?
What is a working capital cycle?
The time taken by any business to convert its net assets and liabilities into cash is known as a working capital cycle. You obviously need a constant cash flow to have greater control over your business affairs.
What kind of working capital cycle is good for a business?
A long working cycle means that your cash is trapped for a long time without any returns. On the other hand, a short working cycle can make the cash available for your business needs quite early.
Several reasons can affect cash flow, like a delay in paying for assets, receiving inventory or services from suppliers, lesser sales than projection and even delayed payments after the finished job. It is important to manage the working capital cycle to improve short-term liquidity and also for keeping a higher business efficiency.
Having a shorter working capital cycle can make the cash available to be put to use or invested for further benefits. With a longer cycle, this cash remains stuck. And a very long working capital cycle can result in zero returns because the working capital remains almost locked. It may make it difficult for any business to sustain its operations. As a result, the business can end up buying working capital loans for its operational costs.
Having a very short cycle may have the cash ready but it is of no use until invested to make more profits. Therefore, the working capital cycle should neither be very short nor too long.
Also read:- Financial Habits That Will Help You Avail Higher Credit
How can you shorten a longer working capital cycle?
There are several measures to deal with longer working capital cycles. Some common factors that can make a better working capital cycle achievable are:
#1. Smart handling of the inventory
Many businesses end up in a longer working capital cycle because of mismanagement in the inventory. They may have some non-moving items stocked up in more quantity, decreasing the available cash for buying the fast-moving ones.
It is advisable to never hold too much inventory at once. You can stock up your purchases as per your orders to be fulfilled. And for this, you can make use of smart financing solutions offered by Non-Banking Financial Companies (NBFCs) like Oxyzo.
#2. Be active in collecting payments
A delay in payments from the customers’ end can be very stressful. And it is one of the biggest concerns that can block a business’s cash. You can improve your collection system by chasing delayed payments actively. Besides, you can incentivise your customers to get them to make their payments earlier.
#3. Pay your bills timely
It is quite evident that not paying your bills on time can shatter your rapport with your suppliers and loan providers. And therefore, it is always good to pay your bills timely. A longer working capital cycle can create disruptions in this cycle shortening you of the cash you may need for timely payments. For maintaining a healthy credit rating, it is good to pay your bills on time.
And there may be times with good sales and great recoveries that a business may have more cash flow at a time than required. However, it is advisable to pay your bills on time when they are due. Paying them very early than their due dates does not offer any significant advantage.
#4. Making educated decisions
Information and data are what can make a business smarter. A good data structure can help you in making smart and educated business decisions. For example, structured data can help you managing a smart inventory. As it will keep a check on more inventory on stocking up, similarly, it can also caution one against falling short of it.
With the help of Oxyzo Financial Services, you can keep your working capital cycle on the right track. we provide customised business loans and working capital loans based on specific business needs.