Three Tips for Effectively Managing Working Capital
Regardless of a company’s size/industry sector, working capital is an essential metric in assessing its long-term financial health. The working capital available to an organization can be measured by comparing its current assets against the current liabilities. This tells the business the liquid assets, short-term cash remaining after short-term liabilities have been paid off!
Managing working capital has to be effective & should be one of the CFO’s top priorities. It needs to be accurate for assessing a business’s long-term financial health and ensuring that it shall always maintain adequate cash flow to meet its short-term commitments/expenses.
Below are pointers for effectively managing Working Capital
- Manage procurement & inventory
Proper inventory management is a crucial & essential factor in making the most of your working capital for the company. Excessive stocks can be a heavy burden on the cash resources of any business. On the other hand, insufficient stock can result in lost sales & damage to customer relations.
When looking at inventory, it is vital to monitor what you buy, just as much as what you sell. The company’s critical challenge is to establish optimum stock levels, such as promoting better communication between departments & forecasting demand to take better steps to prevent your company from holding excessive levels of stock.
To shorten the receivables period, the company needs to have a sound collections system in place. A critical aspect of working capital is to send out invoices as soon as possible. Companies should reassess invoicing processes to eliminate inefficiencies that may be causing delays in invoicing to your debtors (manual processing, lost invoices, the high volume of invoices to manage, etc]
3 Pay all vendors on time
Making disciplined payments should be a crucial part of any payables process. Analysis of working capital levels shows that the most significant improvement comes from improved payables performance & reduced days payable outstanding (DPO). The company that pays on time develops better relationships with their suppliers & are in a stronger position to negotiate better deals, payment terms & discounts. It seems like a counter-intuitive way of maintaining steady working capital. Still, if you keep your suppliers happy, it could save your money in the long run when getting more massive discounts for recurring orders, bulk buying, and maximizing the credit period.