An organisation’s net working capital is managed by adopting practices and techniques designed to control all its current assets and liabilities.
The inflow of capital can allow net working capital to increase, as someone who has spent a lot of time analysing companies and their cash flow in the private equity sector. Working capital is primarily used for expansion, including equipment and inventory purchases.
Generally speaking, working capital management is concerned with the efficient and effective use of current assets and current liabilities in order to reduce total costs.
- Ensure that the organization manages working capital actively
Finance isn’t the only department responsible for it. Developing a cash-focused management system is a good idea for companies. Using key performance indicators (KPI) on working capital down to the operational level is how cash-focused management can be achieved. Make sure that the KPI Dashboard are aligned with the responsibilities of each manager.
In order to improve working capital, a company needs to engage in active cash management. However, making better gross working capital a company-wide goal takes time. An organization must provide awareness training at the management level and activity training at the operational level for new processes. Firms must provide ongoing support to make these changes successful.
- Alternative funding options should be considered.
Working capital isn’t just available from bank loans and overdrafts. Companies should utilize asset-based finance such as invoice discounting and the internet to raise finance.
- Keep your suppliers informed about your payments.
Here’s a counterintuitive approach to improving your net working capital. In addition to improving supplier relationships, on-time paying companies are better positioned to negotiate better deals. When you don’t have a good relationship with your suppliers, you may not be able to receive goods when you need them.
It would help if you couldn’t keep your commitments either, as that will negatively impact your cash flow. Through third-party payment providers, firms can protect their cash flow and ensure that their suppliers are paid promptly. Sometimes, a company can pay its suppliers but not yet settle up with their providers.
- Deal with your suppliers to negotiate discounts
Companies can benefit from discounts if they pay early, purchase bulk supplies, or place regular orders. FDs need to think about what leverage they can bring to their suppliers. By ensuring that each supplier has only one point of contact, the firm can drive down prices as much as possible. A simple thing like making sure the same name refers to the supplier can make all the difference.
- Expenses should be more visible.
Even small excess expenditures can affect working capital adversely. Also, keep aside some clear guidelines to ensure compliance with rules concerning travel and accommodation. You need the necessary tools to monitor expense claims without much manual work. Corporate card programs allow expenses to be more visible through expense management tools. Businesses can consolidate costs through detailed reporting, improving forecasting, and streamlining operations.
- Maintain an active stock management strategy
One of the biggest drags on gross working capital is holding unnecessary quantities of the wrong stock. It is common for stock problems to arise due to a lack of communication among various departments. An important part of the answer is conducting regular stock checks (monthly or quarterly). Reviewing and acting upon the information that emerges from these checks is important.
Companies avoid inventory management because they fear falling into a dangerous situation where their safety stocks will be depleted, and they will not be able to provide the right level of service. However, revenue and sales can be analyzed for individual products and made-to-order products decided accordingly.
- Improve the efficiency of the payment process
Customers often excuse late payments for all sorts of reasons. Accurate invoices are a key performance measure for receivables billing since they are one of the most common errors. The management of credit limits and more rigorous credit checks can often reduce bad debts, a particular drag on net working capital during hard times.