Working capital is vital for the day-to-day operations of a company, such as procuring raw materials, payment of wages, salaries, and overheads, and making sure that production matches demand, among other key objectives. That is why companies are constantly looking for ways to improve their working capital position.
The simplest formula for improving the working capital position is to collect receivables early and slow down the payables. This is, of course, easier said than done. Many companies often find the reverse happening and run short on cash. Hence, a company has to constantly monitor its cash flow. There should be enough funds for meeting short-term debts, but that should not come at the cost of losing return on investments (ROI) in assets.
Give incentives to customers who pay on time. Identifying delinquency early and taking prompt action will prevent accounts from aging too much. Do not transact business with customers who have a history of defaulting.
Ensure that all debt obligations are met on time. Use electronic payment systems to ensure timely payments, and avoid situations that delay payments and attract a penalty.
Discounts from vendors will help save finances. Maintain a good relationship with them. When your company is facing a cash flow crunch, this relationship will go a long way in receiving some leniency.
Determine whether fixed and variable costs can be reduced. If you examine carefully, you will be able to identify expenses that are wasteful. By eliminating such expenses, you will have more liquidity for working capital.
You should examine the interest on loans or other forms of fixed debt. Check whether you are eligible for a modification in interest rates and thereby pay a lower fixed amount every month. Early clearing of loans can help reduce the cost of paying future installments. All this is saving and can be added to the working capital.
Do not overstock your inventory. Make sure that finished goods are sold as soon as possible and are not idling away in the warehouse. Cut products and services that are not performing.
Automating allows you to track inflows and outflows with ease. Make sure you have strong collection teams to chase delinquent customers. Reward staff members who are able to collect dues effectively.
Resolve disputes with customers and vendors as early as possible. If a case goes to court, make sure that it is resolved without undue delay so that unnecessary legal expenses are not incurred. Receivables held up because of disputes are a major cause of concern for many companies.
Your working capital position can always be improved by earning higher profits, issuing company stock, taking on more debt, and selling assets for cash. However, these strategies should only be considered as the last resort.
Tax incentives save money, which can then subsequently be channeled into the working capital funds.
Keep financial statements and reports current and calculate quick ratios on a periodic basis. This will enable your company to have a clear picture of the financial position at all times and will provide you with avenues for improvement.
Many companies are forced to issue stock or take on debt when they run out of working capital. Your business can avoid this by constantly keeping an eye on the working capital position and finding ways to increase it through better management of the cash flow, customers, and vendors.