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Top 3 Tips How to Make Working Capital Work Effectively for Your Business

All successful businesses have good working capital management in place. Conversely, growing businesses and high sales can strain cash flow or offset working capital balance. It’s a challenge that any growing business will experience continuously.

The working capital management tips below can help small businesses improve operations, pay business expenses, and secure financing.

Inventory reduction and inventory turnover boost

Effectively managed inventory is one of the most potent factors for working capital improvements. Acquiring a higher net working capital calculation is achievable by minimizing slow-moving inventory, avoiding stockpiling, and improving the inventory turnover cycles. While inventory is an asset in the working capital formula, having less inventory in stock equates to more freed-up cash flow.

Cash efficient operation and production techniques are achievable through inventory pulling methods such as inventory management. This method, combined with utilizing inventory automation systems, can dramatically reduce costs and improve capital through efficient inventory management systems.

Using inventory turnover ratio or days inventory outstanding (DIO) metrics to show the average number of days a company stocks its inventory before selling will better understand its inventory turnover. A working capital management team must periodically measure turnover rates, compare them to industry standards, and find opportunities to reduce their DIO.

Doing these will result in improved savings and working capital. Efficient inventory management can positively impact accounts payables, accounts receivables, operations, and overall business profitability and growth.

On-time vendor payments and effective debtor management 

Enforcing payment discipline needs to be an essential part payables process for any growing business. Assessment of working capital levels reveals that the most significant improvement is derived from improved payables performance and diminished days payable outstanding (DPO).

One way to ensure enough working capital is to ensure that money comes in on time. Evaluate your contracts and credit terms with debtors to see if you’re unwittingly giving debtors too big a window for goods and services payment since this can negatively impact your own company’s cash flow. Review credit terms with company management to see that the level of credit offered to debtors is suitable for the company’s cash flow needs. 

Consider implementing more rigorous credit checks and effective credit control procedures for chasing late-paying customers.

Acquire adequate financing

Utilizing adequate working capital financing to improve working capabilities is possible through sufficient liquidity to finance existing operations without the need for excessive risk. By analyzing working capital KPIs and checking working capital needs, a business can choose the right financing solution and adequate fund size for forecasted operational needs.

Furthermore, for short-term business loans, growing businesses may opt for financing fixed assets with a long-term loan to alleviate cash flow. Using existing cash flow for supplier payment or purchase orders can lead to solid relationships, more discounts, and boosted cash return on asset investments counteracting the paid interest.

Improving your working capital will allow your company to generate more cash, enhance operational efficiency, and raise potential growth or profitability. Accomplish thorough research before choosing a working capital provider, including user reviews, competitive differences, and actual terms.

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