May 19, 2022

Practical Tips on Managing Working Capital

3 min read
Practical Tips on Managing Working Capital

Working capital is a critical metric assessing the long-term financial health of the business. The level of capital available to any organization can be measured by comparing its current assets against its liabilities. Companies aim to perform a high level of working capital. This indicates a well-managed company with tremendous potential for growth. Now, there are several benefits of having a high level of working capital as it shows an accurate gauge for estimating the long-term financial health of a business.

In times of economic uncertainty, having capital solutions is vital. Therefore, managing working capital for businesses effectively should be the topmost priority for CFOs. So, here we’ll highlight the positive benefits of working capital.

Practical Tips on Managing Working Capital

Working capital is a critical metric assessing the long-term financial health of the business. The level of capital available to any organization can be measured by comparing its current assets against its liabilities. Companies aim to perform a high level of working capital. This indicates a well-managed company with tremendous potential for growth. Now, there are several benefits of having a high level of working capital as it shows an accurate gauge for estimating the long-term financial health of a business.

In times of economic uncertainty, having capital solutions is vital. Therefore, managing working capital for businesses effectively should be the topmost priority for CFOs. So, here we’ll highlight the positive benefits of working capital.

Improved Liquidity

By gaining a consistently high level of operation capital, organizations ensure an adequate cash flow for any upcoming opportunities or unanticipated scenarios. Moreover, it gives your business organization the flexibility over how they should run their operations that allows them to fulfill customer orders and expand towards newer dimensions.

Operational Efficiency

Optimum use of capital solutions evaded future hindrances in business operations. Businesses and organizations can always use a ‘safety net’ to protect against lack of production or perhaps if there’s a delay in payments received.

Enhanced Profit

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A high-level capital flow is achieved when areas including account payables and receivables are balanced. To operate both departments efficiently, they need to ensure that vendors are paid as per the agreed terms. Now, this may lead to capturing of early payment discounts or an increase in the cash flow.

Techniques to Manage Working Capital

Procurement and inventory

Inventory management is an essential factor in making the most of the working capital. Remember, excessive stocks have a significant burden on the cash resource of any business. Meanwhile, insufficient stock leads to lost sales and damage to customer relations. The essential technique is to establish optimum stock levels and avoid driving up costs.

Payment clearance

Enforcing payment discipline should be a vital part of the payable process. Analysis of working capital shows that the most significant improvement comes from improved payables performance and reduced paydays payable outstanding. Companies that pay on time build strong relationships with their vendors and are able to position more vigorous negotiation leading to better deals, payment terms, and discounts. Remember, if you keep the vendors happy, it could be beneficial in the long run.

Improve the receivables process

To shorten the receivables period, it is absolutely essential to have a sound collection system. Moreover, businesses and organizations should send out invoices as soon as possible. Also, it is indispensable to reassess the invoicing process. This helps eliminate inefficiencies that may be causing delays in sending invoices to the debtors.

Conclusion

The pandemic has had a significant effect on capital flow. A substantial number of businesses are seeking help for seamless capital outflow. While things can get complicated, adequate cash flow maintenance is possible by focusing on the above points.