Working capital is an important measuring tool used for evaluating a business. It can indicate the potential for long-term financial growth regardless of company size or the industry sector that the business firm belongs to.

This task is a top priority of the company’s CFO (Chief Financial Officer). The CFO must effectively manage working capital investments made by the firm. Read on to learn more about how to ensure that your company maintains sufficient capital for your short-term undertakings and long term goals.

If working capital is efficiently managed, it can help to increase your business’ profits. It can also pave the way to smooth financial transactions for your business. Losing one’s focus can have a long-term effect on any business. That is why we’re here to provide you 5 helpful tips for effective and efficient management of your working capital. Are you ready to make the most of your capital investments?

Properly Manage Schedule Procurement and Inventory

A key element in leveraging your working capital is careful inventory management. Excessive inventories can cause a heavy burden on any business cash resources.

Moreover, inappropriate inventory may cause a loss in sales. This can severely damage business relationships with customers. It is important to monitor what you buy in comparison with what you sell. So keep an eye on your inventory level.

This can be challenging, so opt to promote better communication among each department and make regular demand forecasting to avoid unnecessary business stock levels. In addition to increasing storage and insurance costs, stock can be wasted if they are time-sensitive and perishable.

When inventory levels are unknown, stock levels can be difficult or impossible to manage. If left unattended, this creates a high risk of losing sales due to material shortage.

With that being said, periodic inventory checks are useful in monitoring stock levels. Notify finance department heads in your company to avoid any repeated issues on the overstocking or under-stocking of inventories.

You must be in control of what is purchased. Working capital can be increased significantly by investing in procurement automation solutions. The simplification and centralization of the procurement process allow for rigorous authorization.

This will help prevent maverick spending by overzealous buyers. Further, this ensures that procurement agents are allowed to order approved goods and services from preferred vendors only.

Make On-time Payments to Vendors

Payment discipline plays a very important role in the business payout process. Studies show that improved payout performance has led to improved outcomes for business working capital levels.

Companies which pay out vendors in a timely manner develop better relationships with suppliers. This can help you to negotiate better agreements, payment terms, and discounts. This is an intuitive way of keeping your working capital steady. You can save money if you keep your suppliers happy in the long run. In turn, you can expect to achieve higher discounts on bulk purchases, recurrent orders and the maximization of credit periods.

Improve Your Working Capital Investment with Your Accounts Receivable

A good collection system is a must to shorten the receivables periods. Sending invoices as early as possible is a key aspect of managing working capital.

Businesses should constantly evaluate their invoicing processes to avoid inefficiencies. These can result in a delayed invoice to their debtors. You may use electronically generated invoices to speed up your billing and collection process.

Prior to sending invoices to your debtors, it is a must to double check if they are accurate before to avoid delays in receiving payment. If you wish to stay on top of collection dates, send timely reminders about payments.

You should maintain an accurate debtor ledger. Keeping an up-to-date and accurate ledger will help you greatly in facilitating a smooth collection of payments.

Effective Management of Your Outstanding Debtors

It is necessary that the money your business needs shows up on time. This ensures that you have enough working capital. You may reassess your contracts and credit terms with debtors if needed.

This is to make sure that you do not use excessive payment windows. These may have a negative impact on the cash flow of your business.

It is the duty of the company’s CFO to properly review the company’s management and credit terms. This is to ensure that the level of credit you’ll offer to debtors is appropriate.

In order to limit unrepaid debts, more stringent credit checks may need to be implemented. Effective credit control procedures need to be properly established in order to avoid late-paying customers.

Make Sound Financing Decisions for Your Business

The cheapest source of cash in your business is your working capital. This money is interest-free and isn’t subject to conditions. Companies who are able to make sound decisions regarding strategic investments drive performance. Likewise, there can be an enormous impact on cash flow when assets are attached to unpaid invoices.

The best way to ensure that working capital is properly managed is to use key performance indicators (KPIs) all throughout the business operation. You may use KPIs such as the number of days sales outstanding and days payables outstanding. In order to maintain a sound working capital management strategy, it is essential to continuously monitor the metrics.

The first step is to determine your business requirements first. Businesses require different funding solutions at different stages. That being said, it is imperative to have regular conversations with the senior management team and external financial providers about internal plans and working capital requirements. This will help you in carefully planning and assessing your business working capital needs in accordance with your company’s strategic objectives.

The sole purpose of managing your working capital investments is to ensure that your business is liquid and you have enough cash to fund your short-term commitments. You can look for strategic ways to streamline business expenses without sacrificing the quality of the products or services your company is offering.

In some cases, you may negotiate to delay payment for some of your inventory. For example, if you have a poultry business and you are renting your poultry house, you may negotiate with the owner to pay the rent after your rearing period. This will lessen up the working capital you’ll need.

The smaller your working capital investments are, the easier it will be for you to manage and maintain it. You may also try not to store too much inventory in your warehouse. This is especially the case if it will greatly cost you in hold inventory.

For instance, if you have a meat shop business. Storing chicken meat, pork and beef for too long will not help you cut costs as you will need to refrigerate it. The additional cost of electricity has a negative impact on your working capital.

Take Good Care of the Customer

Every business person needs to know that their business is profitable, liquid, stable and worthy of investment. Any business can succeed or fail. As a friendly reminder for those who are just starting a business, it is important that you maintain a good reputation with your suppliers and clients.

Having a good relationship with your suppliers will have a huge positive impact on your business. Befriending them will enable you to get high discounts on materials that you need to make your final product. They may also grant you a credit line with minimal interest or no interest at all.

On the other hand, a good bond between you and your customers will enable you to establish brand loyalty. This can help you in making stable sales and profits. Loyal customers often help your business by referring your business to their friends.

Among other reasons, you must not forget that your customers’ tastes and demands may change in the blink of an eye. This is why it is necessary to continuously strive for excellent results through trend adaptations and innovations on your products or services.

Managing a business is a tough task but it’s worth it to guarantee your success. These working capital investment tips will surely help you in stabilizing your working capital investments.

Looking for More Insight?

It is our goal to help you grow your business and your working capital investment. If you want to learn more about your company’s finance and operations, make sure to check out more of our valuable articles.

We provide our valued readers with the most informative, timely, and valuable business advice to help them effectively manage their businesses.