Working capital is the most essential tool when it comes to smooth business operations. It is the total after subtracting the current assets from the current liabilities. The entire business operations depend upon working capital, as it is the cornerstone of business. Managing money is quite difficult when the expenses are higher and; hence, there is a need to maintain all the factors which have a significant impact on increasing or decreasing of working capital. It will notify the shareholders about the running efficiency of a business, and if the company has built so much of inventory or accounts receivable, then it is quite dangerous to evaluate the payables.
There are certain fundamental considerations to improve the working capital for any small and large business setups. Let’s take a look:
First of all, a business owner should have to look into the cash flow statement immediately. There are certain elements that can weaken the working capital such as account receivables and inventories. It is necessary to move the inventory in an efficient manner to keep a strong focus on receivables. The most valuable thing is to control the collections, if a business owner has to progress more. Work devotedly with the front end collections such as credit worthiness, authorization levels and assets, instead of writing to the uncollectible accounts or a collection agency.
Though the backend team is responsible for the collections, it is necessary to communicate with the collection team and customers on a frequent basis. A business should be efficient enough to process flawlessly to meet the certain changes in the customer’s payment plans. If the customer is valuable and falls back when it comes to payments, then keep communicating till the end of the solution. Let the customer know about the short payment plans rather than not paying, to improve the working capital.
When it comes to Accounts payable, a company can stretch the length of regular payments. If there is a period of thirty days, then extend the payment up to forty five days. This surely works, but do not attract the suppliers. They may become less concerned to grant credit. The best thing is to be more laborious in forecasting to keep the inventory levels minimal, and maintaining the accounts payable efficiently. A vendor will play a vital role in such condition. Ask the vendor that if there is an opportunity to pay later than a regular payment time. An advance payment can be the solution to convince him.
Another important factor to improve the working capital is sufficient money maintenance. A business cannot grow if there is no cash available. Maintaining cash flow is not an easy task. It will surely need some time. The first thing is to benchmark the business, and if it is not possible, then measure day to day progress. Some few measures are Days Payable Outstanding, Days Inventory Outstanding and Days sales Outstanding.
Improving the working capital is not a hard nut to crack, but there are some above mentioned essentials that should be followed to avoid the complexities

Working Capital

Author: XavierJain

This author has published 26 articles so far. More info about the author is coming soon.