Before we proceed with the factors that hamper capital management, it is good to read about capital management. Many people know that money flows through global economies but do not know-how. If you go by definition, a company utilizes the available funds. Proper utilization of capital resources can give any company a predominant position in the market. Now, there is not just one type of capital but many, namely short-term capital, long-term capital, seed capital, etc.
Capital comprises funds from several sources like loans, bonds, debentures, shares, and retained earnings. Any company needs these instruments either from a financial institution or an individual. Additionally, each one needs to be managed differently. Despite utilizing these strategies, you will find many companies unable to process success out of the venture. Read about the top reasons that inhibit success in managing capital.
Operating Cycle Period
The amount of working capital you need depends on the length of the operating cycle. It mainly refers to the period required for production. It starts from the moment you purchase raw material until the sale. Thus, the correct estimation is fundamental for the finance manager to ensure a smooth flow.
If the period is short enough, then less working capital is required. Moreover, it improves profitability. You can say that the length of the operating cycle is a clear indicator of the efficiency of the management. Therefore, it is imperative that you recruit the right person for estimation or get rude surprises later.
Corporate Tax Norms
There are several repercussions that taxes might have here. There are a variety of taxes that can directly or indirectly hamper the finances of any company. You should have already come across taxes like income tax, corporation tax, council tax, and so on. You might be required to pay out property taxes as well. Therefore, it is imperative that you make sensible real estate property buying decisions for your business. It is one of the capital requirements.
When you buy commercial space for business, you may approach the authorities for capital allowance and rebates. It can help you save a massive chunk on taxes on your business premises. This, in turn, will help you save money from the capital at hand. But, if your decision is vague on this subject, be ready to pay more to the authorities in taxes. This affects your capital management.
Business Cycle Fluctuation
When it is a season, or the market is booming, there will naturally be more productive, and you would also require a lot of working capital. However, demand is less during the off-season, so less working capital is needed. If you are in a business selling throughout the season, your requirement for capital will also be constant. Therefore, you may be already ready with the figures.
Most business cycles comprise expansion, peak, contraction, and slump. If you cannot identify these cycles beforehand, it can lead to mismanagement of funds. When you may require a more significant amount of funds, you could have already diverted them elsewhere. Moreover, during a slump, you could be having a massive fund pool and counting interest on it without sales. Both these scenarios can lead to a company’s downfall.
A well-managed inventory is the most powerful tool for successful capital management. If you can reduce slow-moving inventory, you can achieve a higher working capital. Additionally, you can achieve success by increasing inventory turnover cycles. Less is more here. If you pile less stock, you get more cash in hand. The reverse is also true, and that is one of the top factors today that challenge the status of capital management for any firm.
Whether to stock more or less depends on what you are dealing in and the demand. Ensure to stock so that demand is fulfilled while sufficient capital is also spared. For this study, the trends, past sales, and customer behavior map out the inventory decision accordingly.
Outstanding Vendor/Debtor Payments
Payment discipline enforcement is the hallmark of any business. You can achieve the biggest improvement in capital management if you have reduced outstanding in the market. You should always keep a steady flow of working capital coming in and pay up the debtors and vendors. A bigger or longer window for payment may hamper your own company’s cash flow.
If your management is not reviewing credits and cash flow needs very soon, you might land in soup regarding your finances. Effective credit control procedures can make the scenario better and more lucrative, not just for the vendors and debtors but also for you.
You can generate more cash for your business with improvements in working capital management. It also affects operational efficiency, raises profitability, and offers potential growth. So, if you are not doing any of these rights, your company’s success will be hindered.