6 Strategies for Effective Capital Management
According to the U.S. Census Bureau, close to 4.4 million businesses get launched annually. However, 20% of most new companies fail within the first two years of their launch, 45% within five years, and 65% during the first decade. And while several factors contribute to an enterprise’s failure, poor capital management is often a leading cause.
Many entrepreneurs struggle to grasp the intricacies of capital management and, therefore, can’t strategize for it effectively. Simply, it refers to an organization’s financial plan or schedules to ensure maximum efficiency in its cash flow. By closely monitoring the company’s current assets and liabilities, a finance advisor warrants that each operation runs smoothly to bring the highest profits and incurs little to no losses. Assets may include all resources you can quickly convert to cash within a year. In contrast, liabilities are certain dues or obligations on your company within the upcoming year. Taken together, these help you assign a working capital that you can utilize to make smart business decisions.
Whether you’re a business owner or an employee, learning certain strategies for effective capital management can help quickly accelerate your career growth. And to aid you in the process, here are six guaranteed ways that are sure to work.
1. Expand your knowledge
While you can hire a professional to help you build a financially secure corporation, expanding your knowledge on the subject is best. It is a great way to understand your financial statements better and make informed decisions regarding where or how to allocate capital. More importantly, the advent of technology and the internet have opened options for online MBA in finance degree programs. These allow you to gain the necessary knowledge and skills while running a business, preventing you from delaying your entrepreneurial goals.
Since MBA programs provide you with a wide range of abilities, they prepare you to work and excel in the business world. Therefore, enrolling for such degrees might be just what you need to set your business apart from impending failure.
2. Set financial goals
Defining your short- and long-term goals is vital when working towards an objective. It’s the same with running a business. First, define your objectives that clearly outline what you wish to achieve for your company. Ensure these follow the SMART criteria and are specific, measurable, attainable, relevant, and time-bound.
Once you’ve stated your objectives, write down the immediate and future goals that can help you accomplish these, then allocate funds based on that. For instance, payroll, utilities, rent, etc., require immediate funding and will help you accomplish short-term goals. While acquisitions, expansion projects, or machinery upgrades require long-term funding and help achieve future goals.
3. Prepare for unforeseen circumstances
For many industries and businesses, these are tiring and unprecedented times. Launching a company when every day is volatile, uncertain, complex, or ambiguous is highly risky. Therefore, you must closely monitor market trends and prepare for worst-case scenarios for effective capital management. Schedule a timeline to routinely run a SWOT analysis to help identify your business’s strengths, weaknesses, opportunities, and threats. Imagine situations where your company might have to incur heavy losses and determine how your capital management can help tide this wave.
Determine where your emergency funding reserve lies and conduct a shock analysis to see how well your company will fare if things turn sour. If you don’t have sufficient funds, see what other sources you must secure capital or which operations you can shut down without risking resolution.
4. Automate payments
Late payments can often result in penalties, additional charges, and damage to your credit score. It may also ruin your relationship with vendors or suppliers and keep them from renewing your contract. By automating payments, you can quickly mitigate this problem and ensure all your payments get done on time. Start by automating your fixed costs and setting up an annual or monthly schedule to pay these bills. This helps streamline vendor-related processes, encouraging them to continue with invoice processing, onboarding, and payment management.
Automated billings are also incredibly helpful in managing your working capital better. You can make wiser financial decisions with a better understanding of your expected expenses and costs. You can also offer this option to your clients and ensure you receive all your timely payments. This way, you can rely on certain revenues and plan where you can utilize them better.
5. Diversify investments
You mustn’t put all your eggs in one basket for a financially secure capital. The key to doing this is diversifying your investments, which benefits the company in two significant ways: reducing risk and increasing the potential for returns.
When you make several investments across different industries, geographic regions, or asset classes—you mitigate the risk of loss due to market fluctuation. While your company might still be able to recover from a minor failure, it will save you from a catastrophic cost if you were to invest within the same portfolio. Since it’s unlikely that all areas and assets will get affected simultaneously, your finances will be safer this way.
Additionally, by investing in different asset classes, such as stocks, bonds, and real estate, you can benefit from each unique advantage they provide and capture a broader range of returns. Investing in different industries or geographies can also help you benefit from emerging trends or growth opportunities that may not be available in your home market.
6. Use data analytics
Any business owner or financial advisor can make a sound and viable decision with the correct information. Fortunately, data collection and analytics are a lot more accessible and more manageable now than it was a few decades ago. Therefore, to gain relevant statistics, integrate a real-time reporting and data analytics system within your company’s operations that can provide financial visibility. Pick the right KPIs and metrics to monitor where the cash flow is working well and the areas of improvement.
Instead of waiting for year-end or month-end meetings, habitually access these analytic data reports every few weeks. The information you receive from these reports can maximize performance, highlight trends, show profitability potential, and even flag discrepancies before its too late.
Without an effective capital management plan, no business can survive these unprecedented economic times. A financially secure approach ensures your company can achieve its short- and long-term obligations, improve its credit, and eventually fund its expansion. Even if you don’t have the expertise to design an effective plan, these strategies above can point you in the right direction. However, depending on your operations and assets, you may have to tailor these strategies to meet your specific goals.