Managing money wisely is key to running a successful business. Digital Masterjee, Professor Vishal Thakkar, shares valuable insights on handling short-term finances. He explains the components of working capital, also known as current assets. These include:
Why Short-Term Money Management Matters
Understanding how to manage these assets effectively can help businesses reduce risks and increase returns. Let’s explore the key lessons shared by Professor Thakkar.
Lesson #1: Managing Inventory Wisely
Inventory is a crucial asset for any business. Having too much or too little inventory can lead to losses. To avoid this, businesses must maintain inventory at three levels:
- Minimum Stock: Ensures the business never runs out of stock.
- Maximum Stock: Prevents stock from becoming obsolete or unusable.
- Re-order Level: Businesses should reorder before reaching this level to maintain a steady supply.
By managing inventory well, businesses can avoid financial loss and improve cash flow.
Lesson #2: Handling Receivables Effectively
Before offering goods on credit, businesses must check the customer’s background, especially their credit score.
Professor Thakkar explains that 80% of a business’s revenue often comes from its top 10 customers. However, many business owners spend more time chasing payments from defaulters instead of focusing on loyal customers.
Instead, businesses should:
- Invest time in understanding their top 10 customers.
- Build strong relationships with them.
- Create more value for them to drive long-term growth.
Lesson #3: Managing Cash Wisely
Cash flow is critical to business stability. When banks notice surplus money in a current account, they often try to sell financial products like mutual funds and insurance. Business owners must be cautious and follow a smart cash investment strategy.
Three Key Rules for Cash Management:
- Safety: Ensure the cash is secure.
- Liquidity: Cash should be easily accessible when needed.
- Returns: The cash should generate reasonable returns.
This approach is known as a short-term investment strategy and helps businesses maximize their financial potential.
Understanding the Balance Sheet
Professor Thakkar highlights the importance of the balance sheet. It helps business owners monitor their financial health and make informed decisions from anywhere.
Massive Action Plan:
- Learn to read and understand the balance sheet.
- Develop a strategy for short-term investments.
By mastering these principles, business owners can take their companies to the next level. Effective money management leads to growth, stability, and long-term success
