Indian SMEs are often forced to take unnecessary debt and other financial obligations to avoid short-term cash fluctuations, when in fact sufficient cash is stuck in working capital. However, working capital optimization is difficult to execute and often needs cross-functional efforts to pull off effectively. The relationship between different components of working capital makes controlling the rolling of cash and cash equivalents important. In this blog, let us look at the various components of working capital which will help in staying solvent throughout the year.
1. Account Receivables
Accounts receivables are what customers and debtors owe to a business for past sales. To meet its debts and operational costs, businesses should collect receivables and convert them into funds. Here are a few examples of account receivables that may impact your working capital cycle.
- Open invoices—Customer invoices often have a credit period of 30 days, allowing customers to pay their debts. As you expect to collect funds shortly, open invoices can be included in your asset column.
- Outstanding credit—Extension of business credit to companies can be added as an asset, until they pay you back.
2. Accounts Payable
Accounts payables is the amount a business must pay out shortly. A key contributor to working capital management, account payables often balance the receivables to maintain efficient cash flow. Here are some examples of account payables that may impact your working capital cycle.
- Vendor or supplier invoices— Payables not remitted to suppliers for goods and services received.
- Operational costs— Often variable for different businesses, operational costs involve material and supply costs, utility payments, office/warehouse lease.
A business’s primary asset that transforms into sales revenues, inventory is often considered as a measure of success based on the rate of selling and replenishing it.
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How to streamline your working capital?
If the above components do not work to create a healthy cash flow balance, your business may lack the resources to meet the minimum working capital requirements. To explore new ways to augment your working capital, you can utilize unsecured loans, business credit cards for startups and some of the following SME lending options:
Unsecured Business Credit Cards – founderscard comes with the best-in-class credit limit, up to 51 days of interest-free credit period, and up to 3X rewards on spends.
Working Capital loans —Many traditional lenders demand at least two years of operational history to qualify for their funding products and have a lengthy application process.
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