How to improve working capital

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Working capital is an indicator of the financial health of a company and its efficiency. The amount available is calculated by subtracting the current liabilities of a business from its current assets. The figure should be sufficient to cover debts in the short term, although a higher figure may indicate that the company isn’t operating efficiently.

Working capital management is necessary for a company to be able to finance the day-to-day running of an enterprise, paying the wages and paying for supplies. Healthy working capital is also required for unexpected expenses and opportunities for investment and growth. By creating a strategy for management of working capital, a business can release more cash to be used elsewhere in the company.

Manage your business

Knowing what the requirements are for working capital in your business will make it much easier to manage working capital. Once you know how much is needed, you can decide how the cash will be released. There will be many solutions, but suitability of each option may change from day to day. Working capital management outsourcing is one of the options faced by companies, which allows them to discuss solutions with a professional.

Reducing outgoings can help to improve working capital. Fewer outgoings or lower expenditure will all result in more available cash for the business. Managing stock is another way to increase available funds. Stock management will make sure that you don’t have excessive amounts of slow moving stock on hand, while having sufficient stock to meet current demand. Also, reduce overheads where possible to release cash into the company.

Manage suppliers

If clients are slow to pay you but you pay suppliers as soon as possible, you will end up with negative cash flow. To maximise working capital, accept the most favourable payment terms from a supplier, with the maximum credit period offered to you. Consider alternative ways of financing supplies if your suppliers don’t extend favourable terms.

Manage customers

Collect payments from customers as soon as possible to improve working capital. Don’t offer too much credit to customers and contact them if payment of invoices is late. Encourage early or prompt payment by offering an incentive, such as an early payment discount. A strict credit control procedure will make sure that invoices are paid within an acceptable period and outstanding debts are kept to a minimum.

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