3 Best Practices for Working Capital Management
A recent study by APQC and Protiviti highlighted 14 best practices for Working Capital Management. The report also highlighted areas in which companies can save money through better WCM management. Below are three of the most important practices to improve your business’s working capital. These practices can be implemented without any special skills, at a minimal cost. To get started, download the study now! The benefits are significant:
First, understand how you calculate your working capital position. Your business’s working capital will depend on the processes you use to manage it. Improving working capital almost always leads to higher profitability. Keeping track of your current accounts receivable will also help you determine whether customers are paying up on time. For a quick overview of working capital management, check out this infographic. This will help you determine whether your processes are maximizing the value of your current assets.
Managing working capital means making sure your company’s assets and liabilities are used effectively. The main objective of working capital management is to ensure sufficient liquidity for day-to-day business operations. The term “working capital” refers to short-term assets and liabilities. It can be quantified using ratio analysis. A company’s working capital is comprised of its current assets, liabilities, and short-term debt obligations. The working capital ratio is an indicator of the efficiency of a company’s cash flow and earnings quality.
A good working capital management strategy should balance five primary items. An efficient collections system is an essential aspect of this process. Additionally, timely sending of invoices is an important aspect of working capital management. To do this, companies should review their invoicing processes and make any necessary changes. Inefficient processes can delay payments and cause late payments, which can damage your credit rating. Finally, your business must keep an eye on the volume of payments received. A low invoice turnover ratio can result in a high amount of bad debts and increased losses.
Working capital is the term used to describe the resources a business uses to meet its daily needs. Current assets are generally cash, accounts receivable, available inventory, and other resources. Current liabilities are the sum of accounts payable, loans, and accrued expenses. An under-valued working capital indicates a company’s cash needs are outpacing its current assets. However, businesses with high turnover of inventory do not require as much working capital.
Another important aspect of working capital management is inventory management. Managing inventories effectively can boost working capital. By reducing slow-moving inventory, increasing turnover cycles, and avoiding stockpiling, a company’s net working capital can be significantly improved. Further, using inventory automation systems and e-procurement can greatly reduce inventory costs and maximize capital. All of these strategies can increase the amount of cash available for your business.