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In times of crisis the very survival of a business hinges on how you manage your working capital. Here are some tips on how to run a tight ship and weather the storm.


Scaling up a business is no easy task. It involves careful planning and management of all business drivers -- people, technology, supplies and capital. In times of crisis, this becomes even more critical as it tests the very survival of the business.

The Reserve Bank of India in its Annual Report of 2019-20, presents a very sombre economic prospect for 2020-21 as the world continues to reel under the effects of the Covid-19 pandemic. It observes that high frequency indicators that have arrived so far point to a retrenchment in economic activity that is unprecedented in history.

So how do businesses tide over these testing waters? One of the most effective tools that could be deployed is to manage working capital needs.

What is working capital?

Working capital is simply the money needed to run the daily business operations of an enterprise. For example, money for purchase of raw materials, labour pay, staff salary, office maintenance, etc.

How is it funded? Typically, through money from sale of products or services. However, various lending institutions also offer loans to meet working capital needs of a business. In effect, a robust working capital system is both a contributor to as well as a by-product of unhindered business operations.

In thriving economic conditions, managing working capital would not have been as challenging as it is today. In a crisis-hit world, effectively managing working capital needs is not just challenging but also a dire necessity as the very survival of a business could rest on it.

With this background, let us look at some options/opportunities for better working capital management.

1. Re-negotiate terms with suppliers/creditors
A large chunk of the working capital commitment is typically reserved for third-party vendor payments towards material/ goods purchases, borrowings, maintenance, etc. Unblock that working capital by simply re-negotiating terms. Let us look at some examples:

  • Increase credit period: Say, a 45-day credit as against a 30-day credit. This will ensure there is a realistic balance in the sales=>cash=>creditor payments cycle.

  • Re-look at contact terms: Every contract term which made business sense in a pre-Covid world, now needs a re-look. For example, 'minimum financial commitment' contract clauses (i.e. payment of minimum compensation to supplier irrespective of procurement/ supply) can be deferred/ waived off/re-worked in light of reduced procurements amidst an operational slump.

  • Pay per use: Have more flexible/adaptable expenses. For example, maintenance contracts (lift, air conditioner, etc.) based on usage/workforce in office, manpower supply agency commissions linked to the level of business activity, etc.

  • Discontinue contracts that are no longer essential: Certain services may have been needed in a pre-Covid world which may not have relevance today. In the absence of clarity on when we will overcome this pandemic, businesses can look at discontinuing such services/terminating such contracts.

  • Evaluate insurance premium payments: General business insurance towards cash insurance, warehousing, factory, etc. can be re-evaluated to explore a reduction in premium payments on account of reduced business activity (such as reduced cash handlings at office, below capacity factory/warehouse usage, etc.).

2. Re-negotiate loan terms

Today, interest rates on borrowings are lower than rates offered in pre-Covid world. Recently, the RBI has also allowed lending institutions to re-structure loans to ease the financial burden on borrowers.

Speak to your lenders to see if your loans could be re-structured to offer more beneficial terms such as waiver of interest for a specific period, higher tenure, lower rate of interest, etc.

3. Re-look at office leases
To ease the lease rental stress, consider these options:

  • 3.1 Rental waivers/deferred rental payments

  • 3.2 Switch to a smaller and reasonable workspace; consider co-working spaces where rentals are driven based on use/seats taken up.

4.Re-structure employee emoluments

Businesses can consider converting a portion of the fixed payments payable to employees to variable pay to be paid over a period of time/achievement of milestone. This would work better than salary cuts or employee retrenchment.

5. Expedite sales collections

To speed up revenue collections and ensure sufficient cash for onward payments, businesses can consider the following options:

  • 5.1 Have an advance payment clause

  • 5.2 Milestone-based payments for a service industry. For example, 10% advance payment, 20% on completion of Stage 1 of the project; 40% on completion of Stage 2 and balance on full delivery

If your business qualifies as a Micro, Small and Medium Enterprise (MSME), you claim protection under the MSME laws to ensure all payments are received within 45 days from date of acceptance of goods/services by your customer.

6. Bill discounting/factoring of receivables

One of the most popular ways to monetise your debtors/receivables is by 'Bill discounting/factoring'. Under this method, businesses can approach a professional discounter/factor to encash the receivables at a discount/commission. This ensures:

  • 6.1 Upfront collection of receivables to meet suppliers/creditor payments

  • 6.2 No time spent on follow-ups for collections

7. GST refund

GST refund is available to businesses engaged in export of services/goods. Typically, businesses file a refund claim annually once the input credit eligible as per books of accounts are reconciled/matched with input credit statements/reports available on the GST portal.

As against this, consider filing for periodic GST refunds (say quarterly), which will help provide necessary liquidity to the working capital.

8. Nil/lower withholding tax certificate

With reduced operations, many businesses are seeing significant reduction in income levels. However, this does not automatically reflect in lower withholding tax deduction on payments. Such excess withholding tax deducted can only be claimed as a refund post filing of annual tax returns. To plug this, consider applying for a lower/nil withholding tax certificate from the tax administration. This will help:

  • 8.1 Maximise receipts as payments are subject to lower/nil withholding tax as specified in the certificate

  • 8.2 Accrue benefits on a real-time as against post-event refund of excess tax deducted

9. Short-term liquid investments

Many businesses either do not invest their surplus working capital in higher yield instruments or prefer investing them only in Fixed Deposits due to low risk appetite.

As a better alternative, business can consider investing the surplus in short-term Government/RBI bonds as this combines liquidity with better returns (as high as 7%) and low risk.

10. Our take

The economic and social fallout of the pandemic has been unprecedented. Since it first hit India in late February/early March 2020, many businesses were caught unawares as their policy and strategies struggled to cope.

Today, as the economy shows some green shoots, the need of the hour is strategic re-thinking and bold business decisions to adjust to the new normal and, more importantly, have a more adaptable business which can weather every storm.

In this piece, we have highlighted some of the most popular and easy-to-implement strategies to improve working capital needs. However, just like any business decision, it requires careful planning and customisation to cater to each unique business proposition.


Merican Consultants

We are a professional finance and management consulting firm.