Working capital management is one of the most critical aspects of a business and works as an excellent gauge of a business’ health and long-term potential. Maintaining adequate cash flow to meet short-term commitments is a big priority and managing working capital efficiently and effectively should be a top priority.
According to a PwC report, businesses in recent years have lowered their focus on improving working capital strategies. Neglecting to pay special attention to good capital management practices can lead to unnecessary troubles and it pays to use and monitor cash flow effectively.
Luckily, there are several great guidelines and tips to keep in mind to make this aspect of any business run more smoothly.
Below are the top tips for developing better working capital management.
1. Pay Suppliers on Time
When managing cash flow, paying suppliers on time should be a priority. The process should be streamlined as much as possible to get those short-term bills out of the way. Although it may seem counter-intuitive, paying vendors on time is a great way to strengthen your business.
Businesses that pay on time develop better working relationships with vendors and are much more likely to have success in negotiating discounts on products and better payment terms down the road. Reducing days payable outstanding (DPO) and improving payables efficiently is a great way to increase the longevity of your business.
2. Improve Receivables and Payment Process
You should also ensure that your receivables process is as streamlined as possible. Be sure that you’ve done everything in your power to make the payment process as easy and straightforward as possible for customers. Speed up invoicing in whatever ways you can.
You may also want to consider switching to electronic invoicing methods to make the process quicker and more efficient. Accuracy is also crucial. Make sure that any invoices you send are complete and accurate before sending them to customers.
3. Improve Management of Inventory and Procurement
Managing procurement and inventory levels is not a task that you should ignore. While either too much or too little inventory can cause problems in your business, you should strive to monitor inventory as accurately and efficiently as possible.
Make sure that your inventory levels are always in the sweet spot and reevaluate processes and procurement requirements regularly. Consider using procurement automation solutions to help you become more effective in managing and controlling inventory.
4. Increase Forecasting Accuracy
Forecasting your business income and expenses is a must to develop good cash flow and working capital management. You should put in an effort to forecast any activity for at least 6 months out, and ensure that you know what to expect in the months to come.
Keep in mind that not all expenses can be predicted, so it is worthwhile to be ready should the unexpected occur.
Be prepared for worst case scenarios. You never know when you’ll face the breakdown of an important piece of equipment, need to purchase extra supplies, or need to hire additional staff. Many great tools exist to increase forecasting accuracy and monitoring, so consider investing in some of these to improve your business.
5. Consider Using Alternative Funding Strategies
With many big banks hesitant to lend, many businesses are turning to alternative funding sources. Many business lenders are available outside of typical banks, and allow many businesses to get the support they need. Other businesses, new and established, have turned to crowdfunding sources as a way to get the capital they need.
You may also consider using a working capital fund to improve efficiency and flexibility in business operations. A working capital fund strategy operates outside of a business’ typical yearly structure, allowing for increased flexibility in operations.
Managing working capital should be an active process that influences all aspects of a business and improves working processes throughout an organization. Managing working capital may vary depending on each individual business’ needs, history, and stage of growth.
Working capital management is an important aspect of any business, that you won’t want to take for granted. By creating effective strategies for working capital, you will improve your business on all levels.