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Important points for Successfully Managing Working Capital

Important points for Successfully Managing Working Capital 1. Controlling Procurement and Inventory

Prudent inventory management is important in making the most of your working capital. Excessive stocks can place a large burden on the resources of cash of any business. On the other hand, shortage of stock can result in loss of sales and harms to relations of customers. When looking at the inventory, it is very important to observe what you buy, just as much as what you sell. The main challenge for companies is to initiate ideal stock levels and keep away from driving up costs for physical storage and insurance as well as wasting stock if it is time-sensitive. This can be done by encouraging better communication and predictions between the departments.

If stock levels are unspecified, then it is difficult to controls the optimum level and the company risks run into a loss in sales, as a result of a shortage in materials. Regular checking of inventories is useful in observing the levels of different types of stock and notifying finance of any recurring overstock or understock problems.

It is especially very important to manage what is purchased. Investment in procurement automation can greatly raise working capital. A process of centralized procurement where each purchase needs authorization that helps to stop maverick spending by making sure that procurement staff is only allowed to order approved products/services from selected vendors.

2. Pay vendors on time

Implementing payment discipline should be an important part of your payables process. Levels of the working capital analysis show that the great development comes from improved payables performance and decreased days payable outstanding (DPO). Expanding DPO should no longer be considered a workable choice, especially with multiple vendors having been damaged by the pandemic and therefore unlikely to provide the choice.

Companies that pay on time to grow better relationships with their vendors and are in a stronger spot to settle better deals, payment terms, and discounts. It looks like a counter-intuitive way of managing a steady level of working capital, but if you make your vendors happy, it will save your money in the long run when it comes to receiving huge discounts for bulk buying, recurring orders, and maximizing the period of credit.

3. Improve the process of receivables

In order to reduce the period of receivables, organizations require to have a good collection of systems on the spot. One important feature of working capital is to share the invoices as soon as possible. Companies should re-evaluate the processes of invoicing in order to remove the inefficiencies that may generate delays in sharing the bills to your debtors. Such inefficiencies may involve manual processing, lost invoices, and a high volume of bills to control. Professional services firm, Deloitte recommends using the technology of accounts receivable to deliver the bills electronically in order to hurry up billing and collection, and ultimately compress the cash conversion cycle. It is also necessary to make sure that bills are correct before they are sharing with your debtors to keep away from delays in payments. Managing correct debtor’s ledger make sure that you are on top of debtor collection dates and can send timely reminders to your customers with respect to the payment.

4. Controls the debtors effectively

The best way to make sure you have sufficient working capital accessible is to make sure money is coming in on time. Reevaluating your contracts and credit terms with debtors may be essentials to make sure you are not giving debtors too huge a window to pay for goods and services, as this may be affecting negatively your own company’s flow of cash. CFOs should review terms of credit with company management to make sure that the level of credit being provided to debtors is suitable for your company’s cash flow requirements. To decrease bad debts, you should initiate more careful credit checks and make sure that successful procedures of credit control are in place for following the customers’ who are paying late.

Conclusion

The Covid-19 pandemic has introduced a number of challenges in working capital for businesses covering a range of industrial parts. Economic variability will still continue in 2021 and businesses must look at new ways to finance working capital in order to control the operations. By aiming at inventory, payables, and receivables organizations will be the best place to manage enough cash flow and manage short-term responsibilities in the months ahead.


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