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How small retail stores can achieve good working capital management

Rana Vikram Anand
27th Jun 2018
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Running a retail store is a capital-intensive business, and with large retail players and e-commerce companies constantly expanding their horizons and market footprint, smaller retailers need more products, categories, and customers. This requires an infusion of working capital. Dealing with suppliers demanding payments more frequently on the one hand and uncompromising consumers willing to run to competitors at the drop of a hat has made managing working capital increasingly difficult for small retailers in India. With structured financing opportunities reducing for SMEs from traditional channels such as banks, it’s becoming difficult for them to arrange capital at a reasonable rate within a specified time frame.

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Understanding the market disparity

Small offline retailers tend to cater to small neighbourhood markets, which limits their pool of customers. The movement of customers towards e-commerce has further reduced footfalls and margins impacting revenues. With each customer becoming more precious, businesses are depending on customers who have long relationships with the retailer. That also means extending better customer service, more products, and most importantly, monthly billing, i.e. credit. This restricts their available working capital considerably. Depending on large orders further blocks their working capital as the credit period is 45-90 days for such orders.

Usually, retailers fulfil their daily expenses on things like rent and salaries from daily sales which depletes their working capital. Therefore, even to fulfil moderately large orders, they don’t have enough cash and hence have to borrow from suppliers or from the market, which is time-consuming as well as expensive.

Technology-driven flexible credit options

Recognizing the need for flexible working capital credit, a few tech-driven platforms are disrupting this domain by offering working capital credit with a flexibility that is unmatched in the market. Their collateral-free credit products, ranging from fixed-term loans to flexible lines of credit, are readily available digitally with minimal documentation. They even innovate with revolutionary offerings such as PoS machine swipe-based cash advances to merchants and invoice discounting. The former allows businesses to receive loans based on their sales volumes, helping them plan immediately for demand and seasonality; the latter allows them to instantly get cash for supplies made to large businesses based on bills and invoices.

Services such as these are making credit more readily accessible, and are successfully empowering capital-starved small retailers across the country. While such platforms have levelled the playing field, achieving growth and broader market success for retailers such as these requires more efficient working capital and cash management.

Here are some ways in which retail merchants can manage their working capital more efficiently:

Upgrading their technology

Technology is making its presence in the retail space more apparent day by day, and a majority of retail operations today can now be optimized and managed digitally through easily deployable systems such as an ERP and CRM. This helps retailers provide a better class of service, and makes them more attractive to consumers who are hooked to e-commerce. A one-time investment in the right technology systems to facilitate retail businesses can ensure greater revenue generation and customer satisfaction while using efficiency to create more working capital in the long run.

Using available capital wisely and strategically

Increased working capital from technology-driven credit platforms can be used strategically to resolve working capital problems in the long-term. Small retailers can increase their categories and stocking, looking to procure more fast-selling items with higher margins to create more turnover and margins. Further, having more working capital at hand helps retailers plan their inventory orders more efficiently, and negotiate better margins with their distributors because of their improved bargaining position.

Lean inventory

Small offline retailers can also decrease their working capital by opting for a leaner inventory. By reducing buffer stocks based on existing sale numbers, businesses can save on extraneous procurement and storage costs, reducing overall operational expenditure and increasing available capital.

Discounts to encourage early repayment

While extending credit to patrons might be an inescapable reality for retailers, they can innovate to ensure that they are paid on time. By offering special discounts to customers clearing their dues earlier, retailers can encourage faster repayment, ensuring that their cash inflow is faster and more efficient.

Timely payment to distributors

Having a good working relationship with distributors can have a variety of benefits, and the best way to accomplish that is for retail business owners to promptly pay their dues. Doing so would establish trust between the two parties, and business owners can encourage distributors to offer better deals and discounts.

Bulk orders

Retail business owners can rely upon online e-procurement marketplaces and other wholesale outlets to fill their inventory with quality products at affordable rates. Further, bulk orders often come with attractive discounts, which would also have a positive effect on working capital.

Better banking and documentation

Many retailers tend to ignore one of the most vital aspects, i.e. documentation part of a business. While they sell on bills and rent in shops and pay distributors on time, they do it informally through cash transactions. Some of them don’t even deposit the cash collection in the banks. This impacts their creditworthiness. If their cash collections reflect in the bank statements, it helps them establish the strength of the business in credit checks. Also, proper documentation on rent agreements, shops and establishment proof, and salaries shows their regular expenses and reflects their margins, which in turn allow lending companies to assess them better.

By following the simple rules given above, new-age retailers can grow sustainably in the market and face the competition with more strength.

Rana Vikram Anand is President at Indifi, a technology-based debt financing platform for small businesses.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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