How To Effectively Manage Working Capital
Disrespect the importance of working capital, and it is bound to damage the business’s financials heavily. It has no prejudice against the company’s size, the industry it falls under, or the operational strategy it practices. Poor working capital management could further translate into halting growth, or even worse, shutting down operations.
It is one of the most significant and accurate determinants an organisation can use to measure the business’s financial health. It is calculated by analysing the ratio of assets to its liabilities. It calculates the value of assets after all liabilities have been paid off.
Efficient working capital management helps a company maintain a healthy cash flow, which further smoothens business operations.
On the contrary, when working capital is not effectively managed, it significantly impacts the company’s ability to expand and improve operations.
How To Manage Working Capital Efficiently?
- Manage Inventory – Inventory management is an integral part of working capital management. A surplus of stock could overburden the company’s cash resources, while inadequate stock could result in a decline in sales. What you purchase is as important as what you sell when it comes to inventory management, and a company must always strive to maintain optimum stock.
- Making Timely Payments – Making disciplined payments to vendors should be a process deeply ingrained in the organisation’s system. Statistics show that companies that make well-timed payments are in better positions to negotiate good deals, better terms, and bigger discounts. Although it may seem to be counter-intuitive, maintaining a happy supplier means better cash flow for the company in the future.
- Efficient Receivables Process – Shortening the receivables duration helps bring in cash quicker and more frequently. It, therefore, makes sense to build a robust system for collections. To start with, the business must send out invoices straightaway. Any delay will lengthen the cash conversion cycle. This is why many accounting firms suggest automating the invoice delivery process by way of modern financial technology. This will auto-generate invoices with little to no inefficiencies. Furthermore, it can also send out timely reminders.
- Efficient Debtor Management – One of the key methods to ensure that a company has sufficient working capital is to ensure constant cash flow. Reevaluating contracts and terms with debtors may require making sure that you are not providing debtors to too long a window to make payments. This may harm your company’s cash flow. Additionally, more stringent credit checks must be implemented along with effective credit control procedures in chasing late payments.
- Informed Financial Decisions – It is said that working capital is the fastest and cheapest form of cash since it has no conditions and is interest-free. Many organisations do not require debt financing if they use working capital openings within their balance sheet.
Prioritising working capital management over loans to make financial decisions drive operations efficiency and the overall performance of the company. On the other hand, having unpaid invoices and excess inventory can adversely affect cash flow.
To ascertain good management of working capital, determining business requirements, and the best way to fund it can be the first place to start. If possible, always look into your balance sheet for opportunities to inject cash without having to take on debt.
It is also prudent to have robust structures in place when generating invoices and collecting receivables. It will aid in accurately assessing capital needs and the apt solution for those needs.