Working capital is an essential metric across industries that helps in assessing the financial health of any business in the long-term. It can be measured by comparing its current assets to its current liabilities. Also, it indicates the level of short-term liquid assets after short-term liabilities are paid off. Effective working capital management ensures adequate cash flow is maintained by businesses, helping them meet their short-term undertakings. If a company fails to manage its net working capital effectively, it can result in cash flow problems such as liquidation of assets, legal troubles, and potential bankruptcy. Therefore, effective working capital management should be one of the top priorities of businesses. Here are some of the effective tips that companies can follow to improve their working capital management.
Working capital management can help companies in enhancing the visibility of key-value KPIs such as turnover ratios and cost benchmarking. Want to know how? Get in touch with our experts right away.
Tips to Manage Your Working Capital Effectively
Tip #1: Optimize inventory and manage procurement
Inventory management plays a crucial role in making the most of your net working capital. If stocks are in excess, this can impact the cash resources of any business negatively, whereas, insufficient stock can lead to loss of sale and damage relationships with customers. One of the major challenges that companies face is having optimum levels of stock. Also, companies should focus on establishing better communication between departments to avoid unnecessary levels of stock. All these measures can ultimately help in improving their approach to working capital management.
Tip #2: Pay vendors on time
The analysis of working capital levels shows that companies that pay on time establish better relationships with their vendors. Also, such companies can crack better deals, discounts and payment terms. It acts as a counter-intuitive approach to working capital management. If suppliers are happy, it can help in saving costs significantly in the long run by securing larger discounts in bulk orders and maximizing the credit period.
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Tip #3: Make informed financing decisions
Managing working capital enables companies to make better, strategic investment decisions. This can help in driving operational performance and efficiencies. On the other hand, unavailability of sufficient operating liquidity due to unpaid invoices or assets being tied up in the inventory can impact cash flow heavily. Therefore, to improve working capital management informed decision making is very important.
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Tip #4: Manage debtors effectively
For effective working capital management, it is crucial to managing expenses. For this, businesses need to reassess their credit terms with debtors to make sure they are not given too big a window for payment. Companies should necessarily review credit terms to ensure that the level of credit being offered to debtors is coordinated with its cash flow needs.
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