Working Capital Management Tips – How to Manage it Effectively
Effective working capital management is at the crux of every successful business strategy. Without enough capital, not only will a business have to pass on growth opportunities but they could end up struggling just to cover daily operations. Consistently maintaining positive working capital can be the difference between success and failure – especially during an economic downturn. However, even when the economy and business are good, working capital management is vital to keep your business moving forward.
Simply put, positive working capital is what a business has left of their current assets once their current liabilities have been satisfied. Proper working capital management provides important benefits.
Maintaining a high level of working capital ensures that a business has sufficient cash flow. This will allow them to not only cover the expense of their daily operations but also to take advantage of unexpected opportunities or handle unanticipated expenses.
Improved liquidity gives the business the ability to prevent disruptions to its daily operations. Fewer disruptions increase production which in turn, keeps the business operating at a high level of efficiency.
Consistent Cash Flow Cycle
The accounts receivable and accounts payable departments of a business play a key role in maintaining sufficient working capital. Encouraging the timely payment of receivables can prevent a gap in cash flow. This will provide the ability to satisfy accounts payable early, receive any early payment discounts, and avoid late payment fees.
Improving Working Capital Management
Although surviving the economic downturn caused by the recent pandemic was tough, it opened many business owners’ eyes to the need for improved working capital management. Not only will it make things easier when business is good but having sufficient working capital when the unexpected strikes will make the road to recovery easier. Here are some tips to ensure your business is maintaining sufficient working capital.
Maintaining the proper inventory level is vital in preserving your working capital. However, achieving the ideal inventory level can be reminiscent of Goldilocks’ visit to the home of the three bears. Keeping too much inventory on hand will ensure you can meet customer demand in a timely manner. It can also tie up your working capital, reducing your liquidity. Too little inventory can result in the failure to meet customer demand, causing your customers to seek out your competitors. Analyzing previous sales and creating future sales projections will help you determine the proper amount of inventory to purchase to meet customer demand and preserve working capital.
Evaluate Your Receivables Process
During the height of the pandemic, you may have been more flexible with your accounts receivable. Now is the time to require your customers to return to your original payment terms. You should also evaluate those terms. Can you shorten the time between invoicing and the payment due date and still retain your customers? Or offer a slight discount for early payment? This could significantly decrease the possibility of a gap in your cash flow and improve your working capital management.
Accelerate Accounts Payable
Tightening up your receivables process and improving your cash flow will allow you to pay your vendors faster. On-time and early payment can strengthen vendor relationships and result in receiving better deals, payment terms, and discounts.
Working Capital Funding
Even with the proper working capital management, a business may still occasionally find itself in need of some additional capital. CapFlow Funding Group may be able to help. If your business needs an immediate, short-term influx of capital to keep your business moving forward, alternative merchant funding options can be a great solution.
At CapFlow Funding Group, our team of professionals will evaluate your unique situation and help you determine which funding option would best suit your company’s needs. We service many different industries with a variety of different funding needs. In addition to merchant cash advances and invoice factoring, we work with trusted partners to provide additional merchant funding options. Contact us today!