When you want to keep your company ahead of this pandemic, then you should understand and reduce your cash conversion cycle. For recovering from the COVID-19 shutdowns, businesses will have to face many challenges. Many of us should start thinking about restarting our businesses from level zero. You should fully understand your working capital requirements for fully recovering from this problem.
Working capital is the funds that will fulfill the essential daily operations of your business. Usually, you will have continuous cash flow with your expenses and your income, so tackling your working capital would not have been a problem for fulfilling your supplies and completing your orders on time. Completing orders would have supported filling up your inventory and supporting your sales. But due to this pandemic, all these cash flows have entirely stopped, which will put pressure on everything so that you have to start from square one.
The incomes which you had in your account prior to this pandemic would have already been paid out. Clients from whom you are expecting to get paid are likely not to pay any sooner either. Your bank account would have given up and would have reached a state which is lower than the usual by paying off the operational costs and your supplies for the future. Sometimes you might be in debt which will probably stretch your operating line and hold you up.
So this is the time you should think about restarting or gaining up hand on your operations. How can you manage your finances and make them work wonders for you? This guide will help you through it.
Your Current Available Working Capital
It would be best if you first started with calculating your working capital when you are thinking about restarting your business from the start which you can do by subtracting your current debts and your existing assets.
For instance, when your current assets as a total are Rs.5 lakhs, in which you have Rs.1.5 lakhs are cash, Rs.2 lakhs as receivables, and filled up inventory which you can use is Rs.1.5 lakhs. Then your current debts are Rs.2 lakhs on loans, Rs.1 lakh on your inventory costs, and then your working capital will be Rs.2 lakhs.
How Much Working Capital Will You Need?
For calculating how much working capital you need you can try to visit STFC, and you should follow the below steps:
Estimate Your Cash Conversion Cycle
The time taken for the business in converting the receivables and inventory in cash is known as the cash conversion cycle. When you buy a stock, you will have it and work on it then release it for getting your invested money back.
Only when you receive the money for your work from your customers, it will be taken into account. The time for which you are holding up your inventory and the collection time which it needs for using your list productively for receiving cash from your customers is very crucial. Most vendors are offering the time they can to pay them back for the inventory, but that can be done only for some time.
Sometimes you will have to give time for your customers to repay you the money - it’s just the mutual understanding you will have to accept because of the pandemic. But it would be best if you still thought about your cash flow for fulfilling urgent expenses like salary for your employees, rent and other essential needs.
So you should find out how you can reduce your cash conversion cycle like:
- You can ask your customers for paying off how much they can?
- You can order inventory after some time.
- Quicken your collections aggressively.
- Extend the time for your payables.
- Invoices should be issued at the earliest.
When you find out these, it will help in finding out how working capital you will need for ensuring business operations until your sales are healthy.
Multiply Average Sales Per Day With Cash Conversion Days
You can estimate your working capital when you multiply your cash conversion days with your average sales per day. The comparison of this will get you the amount of working capital that will be sufficient for your daily expenses over the cash conversion timeframe. When your working capital estimate is higher than what you have in hand, then you should apply for a working capital loan.
The longer your cash conversion cycle takes place, the more working capital you will need both in the form of operating time and funds for operations.
Can You Manage To Restart Your Business Aggressively?
When you want to proliferate, you will need to have more working capital because as you grow, you will have to spend more on the costs as well. Make a note of all the funds you have and mentally ask yourself whether you can manage to restart it without any pressure. When you doubt it, then you will have to pursue going for a moderate and manageable growing phase. When you have extra funds, then you can grow fast without worrying about financial pressure. If you don’t analyze it, you will be stuck with a large stone, and your business will suffer.
Strict Cash Flow Management
In a situation like this, you should be sure to manage your cash flow well and continuously. It would be best if you understood that each penny matters.
Manage Your Loans
Maintaining a good credit score will ensure that you are successful. You should always know where you can find a buffer for financing for your losses. So make sure to find a state which can help you cope up with your finances.
Save Your Penny
Always make sure to have a safety buffer that will help you with situations like these. You would have understood by now that life is just unpredictable, so make sure to save money whenever you can for ensuring your success at all times.
As an entrepreneur, you should maintain a healthy relationship with your employees and your customers responsibly. Also, making sure to secure your financial health is good when you want to manage your cash flows efficiently and pay your loan EMI on time without defaulting. Don’t aggressively acquire debts that you cannot afford to get for just restarting your business.