Question

Read the article posted under this week’s media links.   

While it is in regard to firms in India. Much of it applies to small retailers in the U.S. Which of the “Approaches he presents do you think would be most successful in optimizing working capital management?

Every business requires capital on an ongoing basis to operate at better margins and achieve increased turnover. In today’s scenario when large retail players and e-commerce companies are expanding their presence to every nook and corner of the country, the need of working capital has become more pronounced for smaller businesses to survive and thrive in the market. However, with suppliers demanding payments more frequently than before, the management of working capital has become increasingly difficult for offline Indian retailers.

Let us better understand the prevailing market disparity and find out ways for retail businesses to better manage their working capital:-

Straining supply chain: The challenge of extending credit to customers by retail outlets

Retail businesses are driven by different market dynamics vis-à-vis their manufacturing counterparts. They have a relatively small area of reach, generally a neighbourhood or two, which considerably limits their targetable market and potential customers. The advent of online tech-driven e-commerce marketplaces, with their offerings ranging from groceries to consumer durables, is further bleeding their revenues. In order to maintain their business, retail merchants have to build a good rapport with their regular customers beyond normal transactional relationship. In most cases, a regular retail shop owner has to be well-acquainted with families and even the household staff of his or her patrons. He/She also has to extend credit to such customers as an act of favour, which effectively decreases the working capital. From time to time, retailers also receive mass orders from business corporations, in which they have to extend debt on invoices that is settled within 30 to 90 days – further reducing their working capital.

How do retail businesses get working capital?

Businesses ideally divert a fixed component of their generated revenues towards working capital and/or on the basis of their anticipated financial need. However, when the need of working capital outmatches the available reserves, a retail outlet has to turn towards supply chain-based merchant credit to avail the same or to execute an order. But such merchant credits are quite disadvantageous for businesses as they involve a tedious and time taking process. Lately, a few tech-driven platforms have begun extending merchant credit with an unmatched flexibility. They allow businesses to digitally avail collateral-free loan products, ranging from term loans to readily available line of credit with minimal documentation. Some cutting-edge platforms such as Indifi even provide revolutionary offerings such as POS machine swipe-based merchant cash advance (enabling businesses to receive loan based on their sales volume) and invoice discounting (wherein, businesses can encash the extended debt on invoice to their business partners). Such platforms have been quite successful in transforming the scenario and empowering capital-starved retail outlets in countering the negative impact of capital unavailability.

While the rise of such platforms has created a level playing field within the market, efficient management and utilization of capital becomes all the more imperative for retail outlets to ensure growth and broader market success.

In order to manage their working capital more efficiently, retail merchants can follow these approaches:

Upgrading technology:Technology is remodelling the shopping experience for both customers as well as retailers. A majority of retail operations can now be seamlessly conducted using advanced (and easily deployable) systems such as ERP and CRM. Doing so enables retailers to achieve greater visibility (with regard to supply chain and customer touchpoints), speed up decision making, penetrate the online market, and upskill their workforce to boost efficiency. A one-time investment in technology can help ensure greater revenue generation, customer retention and satisfaction, as well as higher working capital to work with in the longer run.

Higher Turnover & Margins- With access to increased working capital, small retailers can increase their category spread resulting in higher turnover. They can also invest in better store planning & assortments providing them with better margins.

Better Planning & Negotiating Power: Access to capital allows retailers to plan their inventories more efficiently. Being equipped with the desired capital also enables retailers to negotiate higher margins with the distributor.

Lean inventory: Retailers can also decrease their working capital requirement by making their inventory lean. For example, if 50 units of a particular consumer good, say a two-minute noodle, are consumed every week, buffer stock of additional 50 units can either be avoided or decreased to 10. This saves procurement and warehousing costs of about 40 to 50 units, thus decreasing the overall operational expenditure and increasing the working capital. This approach can be adopted for the entire inventory, thereby making working capital available for other more significant business ventures.

Discount on credit: An operating business, while extending credit to its patrons, can offer special discount to them on early repayment of the credit. This encourages customers to pay their debts earlier, thereby shortening the credit cycle for retailer and ensuring availability of funds. But this tactic must only be selectively used as it can also negatively affect other cash-based transactions.

Timely payment to distributors: Paying your distributor on time can have multiple merits besides having superlative supply chain management. Timely payment to the distributor is more likely to extend exclusive discounts to you. It will, moreover, give you higher bargaining power while negotiating deals and concessions.

E-procurement and bulk ordering: Retail businesses can discover online e-procurement marketplaces that offer quality products at affordable rates and provide good discounts on bulk ordering. This can increase their working capital.

While extending credit has always been a feature of conventional retail operations, the newfound challenges posed by the advent of online marketplaces has made the survival of brick-and-mortar stores quite difficult. Today, retailers need to rethink their financial strategy in order to ensure availability of working capital. Thankfully, an array of technology-driven evolved digital alternatives, including credit lending platforms, are there to help.

DISCLAIMER: The views expressed are solely of the author and ETRetail.com does not necessarily subscribe to it. ETRetail.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.

About Rana Vikram Anand

Prior to joining Indifi, Rana has held a host of leadership positions in ANZ Grindlays Bank, ABN AMRO Bank, the Royal Bank of Scotland and RBL Bank. He played a pivotal role in creating and executing the RBS India, Retail & Commercial (R&C) Change and Transformation strategy.

Answer 1

The following 3 approaches out of he above mentioned approaches, are expected to yield better results :

Upgrading technology:Technology is remodelling the shopping experience for both customers as well as retailers. A majority of retail operations can now be seamlessly conducted using advanced (and easily deployable) systems such as ERP and CRM. Doing so enables retailers to achieve greater visibility (with regard to supply chain and customer touchpoints), speed up decision making, penetrate the online market, and upskill their workforce to boost efficiency. A one-time investment in technology can help ensure greater revenue generation, customer retention and satisfaction, as well as higher working capital to work with in the longer run.

Lean inventory: Retailers can also decrease their working capital requirement by making their inventory lean. For example, if 50 units of a particular consumer good, say a two-minute noodle, are consumed every week, buffer stock of additional 50 units can either be avoided or decreased to 10. This saves procurement and warehousing costs of about 40 to 50 units, thus decreasing the overall operational expenditure and increasing the working capital. This approach can be adopted for the entire inventory, thereby making working capital available for other more significant business ventures.

Discount on credit: An operating business, while extending credit to its patrons, can offer special discount to them on early repayment of the credit. This encourages customers to pay their debts earlier, thereby shortening the credit cycle for retailer and ensuring availability of funds. But this tactic must only be selectively used as it can also negatively affect other cash-based transactions.