Working capital is the amount available to a business when you subtract current liabilities from current assets. The effective management of working capital is an integral aspect of company success. Ample working capital enables a business to operate effectively, take advantage of opportunities as they arise, and, of course, increase profits. Here are some tips on how your company can efficiently manage working capital.
If you prioritize working capital in your strategic investment decision-making, you can ensure your company has the liquidity to drive optimal performance and growth. This involves effectively monitoring and managing key performance indicators such as receivables, payables, inventory, days sales outstanding, days payables outstanding, and days inventory outstanding.
Review Credit Terms
To reduce the amount of bad debts that impedes company cash flow, make your credit checks more rigorous. Analyze the contracts and terms of credit your business offers to see if too much leniency is causing your cash flow to suffer.
Improve Your Collections System
Be sure that your collections system for accounts receivables is as efficient as possible. Send out invoices as soon as you have delivered products or completed services, and check those invoices to ensure their accuracy. Technology that handles accounts receivables can streamline the process. Periodically remind your debtors if they are late paying their bills.
Keep Inventory at an Optimum Level
An optimum level of inventory means having neither too much nor too little. Too much inventory ties up working capital that you can use for other purposes and also costs more for insurance and storage. Too little inventory impedes sales if you have insufficient materials. You have to keep a balance between these extremes.
Make Timely Payments to Suppliers
Paying vendors on time not only ensures positive relationships with them, but also assists you in negotiations for discounts and improved payment terms. Although at first this strategy may seem to reduce working capital, in the long term it benefits your business.
For more advice on managing working capital, look to Northgate Capital Finance.