EFFECTIVELY MANAGING WORKING CAPITAL OF YOUR COMPANY
Calculated as the excess of current assets over current liabilities, working capital is the pulse of a business, constantly monitoring its health and prosperity. The Covid-19 pandemic has raised significant working capital challenges and uncertainties for companies to maintain their position in the market. Supply chain disruptions have been a major challenge, along with changing customer demands. Usually having a high-level of working capital indicates a well-managed company with a greater potential for growth in the near future. Ensuring a positive working capital not just helps to run a business better but also provides access to funds for growth of the business.
Working capital management is particularly needed since it is an accurate barometer for assessing a company's long-term financial health, and ensures that the required cash flow is always met. Working capital is used to purchase raw materials, make payrolls, buy equipment, purchase inventory, and meet the company's daily expenses. In times of economic downfall, having such financial protection is very important.
In recent years, the role of the CFO and finance department has changed dramatically. By initially analyzing the business through financial ratio and cash flow analysis, and later using the right incentive scheme to implement changes in working capital management strategy and other processes, a CFO achieves an increase in value creation for the company. Therefore managing working capital should be top-tier priority of the CFOs, now, more so than ever.
How to efficiently manage your Working Capital
1. Reduce Inventory and Manage Procurement
Well-managed inventory management may be the most powerful leverage to working capital improvements. Buying excessive stocks can place a heavy burden on cash resources on any business. On the other hand, insufficient stocks can lead to lost sales. The key challenge for companies is to establish optimum stock levels, and avoid increased costs for storage and insurance. Periodic inventory checks are useful for monitoring the levels of stocks, and check for overstock or understock.
Efficient inventory management can have a significant impact on payables, receivables, operations, and overall profitability.
Investment in procurement automation can boost working capital. It is extremely important to control what is purchased. A centralized procurement process can manage the purchases to prevent maverick spending.
2. Increase Inventory Turnover
Utilizing the day’s inventory outstanding (DIO) metrics or inventory turnover ratio that reveals the average number of days the company holds its inventory before selling it will allow the company to better understand its inventory turnover. An analytical team will measure turnovers rates, compare it to competitors, and uncover ways to reduce their DIO that result in increased savings.
3. Maintain the Receivables Process
One important aspect of working capital is to send out invoices as soon as possible. Companies should make sure not to cause delays in sending invoices to the debtors. It's important to evaluate the invoicing process for inefficiencies like lost invoices, manual processing, unsent invoices, or having too many invoices to handle that usually causes delays and errors in sending invoices.
Hence it is recommended to utilize accounts receivables technology to deliver invoices electronically, which shortens the receivables period and speeds up collection and billing. It is also vital to ensure that invoices are accurate before sending to the debtors to avoid delays in payments. Managing receivables efficiently ensures that you are on top of debtors’ collection dates and can remind your customers for timely payment.
4. Timely Pay Your Vendors
Analysis of working capital levels shows that the biggest improvement comes from improved payables performance and reduced days payable outstanding (DPO). Businesses that have lesser accounts payable outstanding have better relationships with their vendors. A better relationship with vendors puts you in a position to negotiate better deals, payment terms and discounts. Keeping your suppliers happy can save you some money in expenses in the long run.
5. Efficiently Manage Debtors
Reassessing your contracts and credit terms with debtors is necessary to make sure you're not giving debtors too big a window to pay for goods and services. CFOs should review credit terms with company management to ensure that the company's cash flow needs are in check. Imposing an effective credit control procedure ensures to keep debtors in place and check the late-paying customers too.
6. Reinvest in the Business
For growing businesses, it is necessary to invest in your own business to manage your capital. Reinvesting in business can come in the form of saving up for new equipment or marketing for an event where everyone can get an idea about your company.
7. Receive Adequate Financing
By analyzing working capital KPIs and determining working capital needs can direct a business to carefully select right finance solutions and adequate fund size. A business can opt for financing fixed assets for long-term loans for a healthy cash flow. Paying your suppliers on time can secure discounts and increase cash returns on assets investments.
8. Resolve Disputes with Suppliers and Customers
With business going on, the chance that some disputes will occur is high. It can be difficult to predict what can go wrong but brainstorming will help make your choices more conflict-proof. Resolving disputes quickly can mean maintaining good relationships, and saving on potential expenses and legal costs.
9. Take Responsibility of Expenses
Does not matter whether the expense is small or large, maintaining records of the expenses is a necessity. Because there are times when small amounts mount up substantially affecting your company’s working capital. Cut back on unnecessary costs and keep a check on expenses.
10. Emergency loans for Short-term loans
Hitting a hard spot causing shortfalls is unavoidable in businesses. To resolve this, emergency loans are the easiest solution. These come in the form of working capital loans, a line of credit, or a merchant cash advance.
A business’ working capital is a critical factor of any business’ success. With prices rising quickly everywhere, businesses must find new ways to finance working capital in order to maintain operations. So whether your business is new in the market, or you are planning to expand it, you will need stable access to working capital, as well as effective financing solutions.