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The way you manage working capital signifies the success of your business. The businesses with stronger working capital have enough cash cushion to seed further growth and expansion. A positive working capital ratio indicates the business is well-positioned to pay its short-term debts and invest further. While a negative working capital reflects the financial difficulties of the business to settle its short-term debts and on the verge of closure if the trends continue for a longer time.
Don’t miss out to read basic things you should know about Working Capital
Working Capital Management is not an independent process of the business rather it is an outcome of how well you manage various business processes. For you to strengthen the working capital, you need to optimize the efficiency of associated areas of working capital. Among the several ways to strengthen working capital, we have highlighted the top 3 areas of working capital and ways to improve efficiency.
Accounts Receivables are the invoices which are yet to be paid by your customer. Accounts receivables are the key source of cash inflow and contribute hugely towards the working capital requirement of the business. The longer an invoice sits as accounts receivable, it blocks the cash flow and lesser availability of cash to meet your business needs.
The faster you convert your accounts receivables into cash, the higher the cash available for business. Timely and efficient management and collection of accounts receivable will be key for positive working capital impact.
Take a look at Best Techniques to Manage Accounts Receivable Efficiently
Inventories hold a huge amount of working capital of the business. The rate at which a company sells and replenishes its inventory is an important measure of its success. Holding too much of the inventories lead to cash blockage and represents an inefficient use of working capital. This also further adds up to cost of managing excess inventories and associated risk such as price fluctuation, stock deterioration, obsolete etc. Understocking puts your business into the risk of losing sales due to insufficient stock.
Managing sufficient stock to meet the forecasted demand will help to mitigate the risk of cash blockage and ensure the right investment of money into inventories.
You need these 5 Inventory Management reports to strengthen working capital and save money
Accounts payable is the money which you owe towards your suppliers or vendors. This is the short-term debt which the company is obligated to pay. One of the key outflows of cash is towards your suppliers. Taking full advantages of credit period and delaying the payment as far as possible within the credit terms will help you to balance the cash outflow and inflow. Considering vendors who offer flexible payment terms and discounts on earlier payment will help here. Ensuring average time to collect receivables is significantly shorter than its average time to settle payables helps to in meeting working capital needs of the business.
Guide to Business Management Software for Start-ups & Small Businesses