The working capital of a company is a measure of its short term health and efficiency. The net working capital should be indicating that the business has sufficient assets to pay its debts. If however the working capital ratio falls into a negative figure, the company may be in trouble and could even face bankruptcy. Careful management is required to ensure that all debts are repaid and the company’s assets are protected – and should be reviewed regularly, anticipating spend and/or capital investment as part of a cashflow forecast process, to avoid such a scenario.
How a management accounting service can help your working capital
Management of working capital is crucial to business health. The main components of working capital are payables, receivables and inventory. Management of cash flowing around the business will reduce risks and the likelihood of borrowing more funds. There may be excess funding available to support new growth or investment.
Management of debtors
If monies owed are collected promptly it can make a huge difference to the company’s cash flow. Late or missed payments can lead to complications for a business, perhaps even problems with suppliers or negative cash flow. Credit control should be a priority for the company, outsourcing to a professional if necessary. Clear credit control procedures need to be put in place and adhered to, so that bad debt is avoided where possible. Use various credit referencing agencies to check out clients before offering credit, and establish credit limits which are reviewed on a regular basis.
Managing creditors
Establish tight controls of spending within the company, to restrict outgoings where appropriate. Have alternative suppliers on hand so you can regularly check for competitive rates, credit terms and discounts. Decide how you will absorb any cost increases from suppliers, whether increases will be passed onto your customers or absorbed by the company. Pay promptly and if possible take advantage of any early payment discounts.
Managing inventory
Excessive stock can also be a burden on cash flow, although inadequate stock may result in lost sales and poor customer service. Establish turnover times for all stock so that you know how long it will be on the shelf before being sold. Stock turnover or work-in-progress (WIP) will depend on the type of business, for instance fresh goods will have a faster turnover than other products. To manage stock effectively you need to project sales, consider the availability of raw materials and other key components of goods, the delivery times and reliability of suppliers.
The management of working capital will influence the cash flow of your company. If you would like to discuss ways to improve your working capital management, with forecasting and processes and procedure reviews, give us a call to arrange an informal discussion.