5 Tips to Manage Working Capital for Your Trading Business

Working capital can be defined as the difference between current assets and current liabilities. It not only determines your profitability and survival, but is also a criteria for lenders when they sign off a working capital loan for you.

If you are in the trading business, the following are some tips for the effective management of working capital:

1. Proper cash flow forecasting- it goes without saying that you need cash to run your business, so you need to plan. Note down the answers to questions like- when you invest cash to buy some goods, how long does it take to sell them and get the cash back? At what time of the year do most of your annual sales take place- is it during Christmas, Holi, or Diwali? How much extra cash do you need at that time? Do the customers pay on time? Do they prefer to buy on credit or wt cash? When do you need the cash, and how can you get it? By knowing the answers to these, you will be prepared for all the possibilities, and even if there is a shortfall, you will be ready to confront it well in advance.

2. Manage your short-term financing needs- you need to be well-equipped to cope with unexpected turn of events, be it the prices going up or the customer asking for more time to make the payment. In such cases, it is better to have other alternatives in hand that are aimed at managing the cash shortfall until payments are cleared.

3. Balance between expanding business and managing your receivables- often, this factor gets overlooked when it comes to working capital. When you provide a credit facility, customers generally make use of it. Your business grows, and simultaneously your receivables grow. It is crucial to strike a balance between growing your business and maintaining the flow of receivables. You can consider setting some criteria, or provide the credit facility only for existing customers with good track records. Give them some incentives to pay early. You may also consider giving some discounts for long overdue accounts instead of simply writing them off.

4. Make use of sales discounts- these can be useful with regard to reducing the amount of money you owe to your creditors. The sales discount on your invoice may be written as 3/5 net 50 terms. This means that if you make payment within 15 days, you will get a 3% discount on the invoice amount. If not, you need to make the full payment in a period of 50 days. In this case, it would be in your best interest to pay early, as you can save more by availing the discount. Look out for creditors who are offering discount or seek a discount from your current creditors. The amount thus saved will help in managing your working capital.

Are you planning to avail a business loan for traders for the expansion and growth of your business? Bajaj Finserv is one of the NBFCs offering MSME and SME loans at low interest rates. The loan amount can be a maximum of Rs. 30 lakhs. Be it a medium or a large business, this facility will surely prove to be of huge help.