The very essence of any business is finance. Out of all the important decisions that an entrepreneur makes, generating, allocating, and investing funds is one of the most significant decisions one has to make. The very first set of investments that a businessman employs to start a business is known as capital, apart from this there are many additions in finances that one has to make at regular intervals. In this article, we will discuss various tips and tricks that an individual can use to efficiently manage capital.
What is Capital Strata Management?
Capital Strata Management is a technique based on which an analysis of assets and liabilities is made in order to manage various components of the business such as expenses, gains, profits, and losses, such that the business is able to improve its efficiency and earnings in the long term and in the short term (working capital).
The basic indicator of efficient Capital Strata Management is when the business witnesses a significant increase in the levels of finance (in terms of the wealth of the stakeholders).
Tips and tricks for Capital Strata Management:
1. Shorten the length of an operating cycle:
- Part of capital that is used to meet the day-to-day expenses of a business is known as working capital. If a business wants to generate more working capital and that too in a shorter span of time, one must shorten the length of the operating cycle. An operating cycle refers to the process of converting the outstanding money which was generated through sales but not yet received.
- A business should offer a short credit period to its customers so that it does not face a shortage of funds for its day-to-day expenses and has a sufficient amount in hand so that no extra funds are to be raised for dealing with very short-term requirements.
Reduce bad debts:
- Bad debts refer to the amount that becomes irrecoverable from the debtor, a business should try to avoid such situations in which the possible occurrence of bad debts increases, because bad debts eventually add to an unnecessary loss to the business, if possible, a business should avoid dealing with such parties that defaulted sometime in the past and make its fund recovery mechanism strong enough to avoid bad debts as much as possible
Reduce unnecessary expenses:
- Another important thing to consider that might make Capital Strata Management is an unnecessary expenditure of the business. Every business should delegate responsibility to the managers of different departments to create a budget, compare the standard budget with the actual budget at regular intervals and make them accountable for all the unnecessary expenditures made by their department, this will instill a sense of accountability among the managers and significantly help the business in managing its finances.
- One can also make special arrangements with suppliers, vendors, and other business dealers and try to avail trade discounts or cash discounts by timely and instant payment of cash as such to reduce its future liabilities or avail long credit period so that it can manage its cash equally well for the current shortage.
Use raised funds for designated needs:
- One important thing to do is that we raise term funds for different purposes, but one very important thing to do is to utilize those funds for their designated needs only, for instance, we raise a long term loan for buying a fixed asset, we must then utilize the funds raised in the name of fixed assets to only buy the fixed assets, utilizing those funds for short term expenses or as working capital will create an imbalance in tracking the expenses, plus, we will have to pay the interest on the amount so raised without even utilizing it for the same purpose, which will eventually lead the business to a loss.
Check the creditworthiness of new customers:
- Provision of credit period to people and customers is a technique f luring customers to the business, often this attracting technique becomes a headache for the business, when it has to run after the customers to claim the amount, expenses on such arrangements is another cause of expenditure for a business.
- Thus, if a business wants to efficiently manage its funds, it must do a small research on those customers, be it an individual, another business unit, or anybody, the concerned business must research from various public record resources such as other businesses, credit rating agencies, tax liens, partner companies, suppliers, and other payment history records, etc., and confirm the creditworthiness of the new customer, this will save the business the future hassle of claiming the amount and add to a smooth functioning and effective Capital Strata Management for the business.
Thus, these were a few points a business can work on to efficiently manage its capital requirements and increase its financial strength.