Working Capital, also known as Net Working Capital (NWC) is the difference between a company’s current assets and its current liabilities. You may not mention capital each day, but this accounting term may hold the key to your company’s success. Working Capital affects many aspects of a business, from paying your employees, paying bills, suppliers, and meeting the short term obligations of the business, to ensuring uninterrupted flow of business, keeping the lights on and planning for sustainable long-term growth
The economic impact of the COVID-19 crisis are increasingly hitting low- and middle-income earners and the poor. International travel restrictions and the full or partial closure of businesses and industries in the country have led to a collapse in the Tourism and Transport sectors. Some major industrial companies have closed facilities and are mulling the extent of layoffs to help curb the spread of the virus, as well as for economic reasons. Clearly, the manufacturing sector is poised to be hit hard during and after this outbreak due to the slowed economic activity has reduced demand for industrial products in the US and globally.
The COVID-19 pandemic is a global health emergency that requires effective immediate action by governments and individual. However, Government and health system capacity to respond to the pandemic is limited. While high-level advocacy has been successful in the release of critical funds for the national COVID-19 preparedness and response plan and back pay of salaries for health workers, adequate financial resources to combat the pandemic continues to be a challenge. Uncertainty surrounding the duration (or even a deepening) of this pandemic clouds any insights into how the Health sector is going to sustain itself.
It is therefore clear that the impacts of this crisis may spill over leaving the post-COVID19 phase comparably worse. With SMEs making up over 70% of Uganda’s economy and contributing above 20% of the GDP, they ought to start thinking strategically so as to stay afloat during and after this period. Among others, limited access to capital-due to uncertainties, financial loss, and low demand for products and services have become a strong pinch in the cash flow cushion of majority of the SMEs. Determining ways on how to efficiently use the available capital and improvising for ways to expand the working capital bracket is a strategy SMEs should look into.
Managing working capital effectively should be top priorities for SMEs since it is an accurate barometer for assessing the long-term financial health of a business and ensuring that the company always maintains sufficient cash flow to meet its short-term commitments.
Tips for SMEs to effectively Manage and Improve Working Capital
1. Manage procurement and inventory
Prudent inventory management is a fundamental factor in making the most of your working capital. Excessive stocks can place a heavy burden on the cash resources of any business. On the other hand, insufficient stock may result in lost sales and damage to customer relations. When looking at inventory, it’s important to monitor the purchasing trends of the customers during this COVID 19 pandemic and buy adequate fast moving inventory and vice versa.
It’s extremely important to control what’s purchased. Streamlining and centralizing the purchasing process enables a rigorous authorization process. This helps to avert maverick spend by ensuring that procurement officers are only permitted to order approved products/services from preferred vendors.
2. Negotiate suitable payment period to suppliers and adhere to it.
Enforcing payment discipline should be a key bit of your payables process. Companies that pay on time develop better relationships with their suppliers and are in a stronger position to negotiate better deals, payment terms and discounts. It looks like a counter-intuitive way of maintaining a steady working capital, but if you maintain your suppliers’ happiness, it could save you money in the long run when it involves getting larger discounts for bulk buying, recurring orders and maximizing the credit period.
3. Improve the receivable process
In order to shorten the receivables period, the company ought to have a good collections system in place. One important aspect of working capital is to send invoices as soon as possible. Companies should reassess invoicing processes to eliminate inefficiencies that may be causing delays in sending invoices to your debtors. It’s also vital to ensure that invoices are accurate before they are sent to your debtors to avoid delays in getting paid. Maintaining an accurate debtors ledger ensures that you are on top of debtor collection dates and can send timely reminders to your customers regarding payment.
4. Manage debtors effectively
The best way to ensure you have working capital is to endeavor that money is coming in on time. Reassessing your contracts and credit terms with debtors could also be necessary to make sure you are not giving debtors too big a window to pay for goods and services – as this may be impacting negatively on your own company’s cash flow. To reduce bad debts, you ought to implement more rigorous credit checks and ensure that effective credit control procedures are in place to chase late-paying customers. In any case this is a period to avoid giving excessive credit to customers because many are also facing cash flow challenges.
5. Make informed financing details
Determining business requirements is the first step in deciding on the best way to fund working capital. Whether your business is starting out in its first few years, or whether it’s time to expand may require different financing solutions. As there are better-suited means of financing for different stages of your company’s lifecycle, it’s important to regularly discuss plans and requirements internally with the senior management team and with external financial providers so that you can carefully plan and assess your capital needs in accordance with the strategic objectives of the company.
6. Avoid Payments in advance
Businesses should as much as possible avoid payments in advance because it they reduce the working capital that would be available for use in the business to buy inventory for sale, pay suppliers whose payments dates are due, pay employees on time to keep them motivated, pay water and electricity bills to avoid interruptions in operations/production and many others. In-case there is an obligation to pay in advance, this is the time to renegotiate and you may be probably heard.
7. Defer expenditure on Long term Investments
Expenditure on long term projects should be halted if the company does not have sufficient cash flows to fund the developments. In the period where business is very slow and businesses are scaling down their operations, businesses that were investing in long term assets and funding them through retained earnings could be to be suspended so that the business does not experience cash flow shortages.
With those tips, SMEs should really be in position to maintain sufficient working capital and stay in business.
Coordinator, Entrepreneurship Institute of Africa (EIA)
EIA is a subsidiary of Finding XY