Working capital is a great way to establish an organisation’s operating efficiency and the ease at which they can meet their short-term financial obligations. Working capital is the capital of a business that’s used in day-to-day trading operations and is calculated as:
Current Assets – Current Liabilities
The purpose of managing your working capital is to ensure your company has sufficient levels of cash to meet short-term operating and debt obligations. Failure to do this could raise red flags surrounding your business’s longevity and may ultimately lead you down the road to bankruptcy.
Given its importance, this blog will outline a number of activities that will allow you to actively improve the state of your working capital. Read on to see what could help you!
Communicate working capital expectations throughout the organisation
One of the key issues surrounding organisations with a poor working capital ratio is that staff throughout the organisation may be under the impression that it’s solely the responsibility of the finance department to manage. THIS IS NOT TRUE. Everyone should be held accountable for their contribution to the success of the business.
One method to counteract this belief is to introduce key performance indicators (KPIs) orientated around cash management for each department. The benefit of this approach is that it aligns everyone’s responsibilities and prevents certain functional areas of your business from working against each other and undermining their conscientious efforts. However, this isn’t an overnight fix to poor cash management; the implementation of new habits takes time, but it’s certainly worthwhile.
Pay your suppliers on time
This approach is counterintuitive. Often you will read about increasing your creditor days to maximise the level of cash in your business, but it can be regarded as short-sighted. The earlier you pay your suppliers, the stronger the relationship you can develop with them, putting you in a stronger position to negotiate better deals.
Negotiating discounts through early payments, bulk supply or regular orders are all possibilities provided you have a meaningful relationship with your suppliers. By fulfilling your commitments to your suppliers, you can become more profitable.
Have clarity over your expenses
If your company has a personal expense account, a lot of the expenditure is likely to be a necessity. However, it’s of real importance that expenses are effectively tracked and monitored as small excess amounts can have a rather large cumulative impact. This tip employs the train of thought that if “you look after the pennies the pounds will look after themselves.”
There are a number of tech solutions to this issue that will provide you with detailed reporting. Having an understanding of where costs can be consolidated allows you to make accurate forecasting decisions that will help streamline your business.
Actively manage your stock levels
The process of managing inventory is difficult and can impact upon many organisations’ working capital. The issue surrounding inventory is too little and you can’t fill orders, while too much makes it difficult to meet short-term debts as your business’s liquidity is tied up in stock.
In an ideal world you would hold sufficient levels of stock to satisfy the current level of demand. However, organisations can face difficulty with sales volatility. There are a number of external market forces that can impact demand, which can sometimes be unpredictable at best. Proceeding to assess the market and attempting to forecast changes to your business demand can allow you to put your money to better use.
Ensuring a healthy working capital balance should be a priority for most business owners. Albeit difficult, there are a number of steps an organisation can take in attempting to improve their financial efficiency so they can begin to generate a cash surplus to fund other operations and growth.