Working capital or cash flow is the backbone of a business, the absence of which may stagnate its growth. If it isn’t used correctly, it may cause huge losses and derail the business. While no business deliberately mismanages the funds, even little things may cause cash flow and working capital mismanagement mistakes.
Below are the six common mistakes business owners should avoid-
Inadequate Or Poor Production Planning
Inaccurate production planning or sales forecasting affects the production process. For example, if you produce more than you can spend, you use more of your working capital in raw materials and managing the inventory. It is one of the worst working capital mistakes.
Review the product planning process regularly to avoid over-production or overuse of resources. Also, analyze the sales forecast and make timely corrections to it. Otherwise, it will result in a delay in production or delivery or an error in planning. You may end up getting your precious funds locked.
Wasting The Valuable Resources
Though some wastage is inevitable in the manufacturing process, it is crucial to keep an eye on the amount of waste, quality standards, energy, time, manpower, etc. If you don’t, you may face a shortage in the working capital.
If the product’s quality standards aren’t maintained, it results in an increase in defective goods. Lack of raw material availability results in wastage of time. Thus, any type of wastage results in spending more money to get the tasks done, which destroys the working capital.
Not Collecting The Account Receivables On Time
As a business owner, you already know that your account receivables are the main source of funds. If you don’t collect the dues from your customers on time, it may clog your working capital. You will likely face cash flow issues, impacting the working capital. If this continues, you need to borrow short-term funds to ensure that the business operations run smoothly.
Using All Your Working Capital
Suppose you get an urgent export order. In order to complete the order, you hired employees and invested a lot in raw materials. Though you need funds immediately, paying for them will eat up all your working capital.
In this case, it is best to look for a b2b lender and apply for a loan to meet these expenses. This way, you will be able to repay your loan in affordable EMIs instead of using all the working capital in a lump sum.
Not Planning For Short-Term Liabilities
At times, businesses may have short-term liabilities in the form of income tax, loan EMIs, etc. If you don’t consider these expenses while calculating working capital requirements, your business may face a shortage of working capital or cash flow.
Similarly, it is necessary to allocate funds for unexpected events. For example, events like a rise in the transport cost due to an increase in the fuel price aren’t expected but might happen. You should plan funds for such events or contingencies beforehand so that they don’t hamper the business operations.
Inadequate Inventory Control Practices
If a business doesn’t consider planning material requirements, it may end up with excess purchase of raw materials or other inventory items. Several businesses add an extra safety margin at the procurement stage, resulting in excess of raw materials.
This further results in over-production. Sometimes, products are ready but aren’t delivered on time. All this not only leads to inventory losses but also affects working capital negatively.
These are some of the most common working capital mistakes that every business owner should avoid at all costs. So, reshuffle how you plan or handle working capital and keep these mistakes at bay to allow your business to grow.