Proper working capital management is a major step for ensuring that you maintain sufficient liquid resources for your daily business operations. Also referred to as gross working capital, working capital refers to the total current or short term assets of the firm including cash, accounts receivable, marketable securities and inventory. Proper management of working capital involves trying to achieve a balance between minimizing insolvency risks and maximizing the return on your assets. It is also advisable for you to take note of the fact that while the long-term analysis of your finances is mainly focused on strategic planning, the process of managing your working capital deals with daily operations. The most effective tips that can help you in effectively managing your working capital include the following:
4 Effective Working Capital Management Tips for your Business
1. Perform proper cash flow forecasting
This process should take into consideration the market cycles, the actions performed by your competitors, the loss of a valued customer and the impact of unexpected events to the overall performance of your business. It is also advisable for you to take into consideration the unanticipated demands of working capital.
2. Create contingency plans for some unexpected events
No matter how profitable your business is, you have to make sure that you still prepare plans that will help you deal with those unexpected events that have an extremely damaging impact to the performance of your business. You should hone your skills in effectively managing uncertainties by preparing risk management procedures. But you have to make sure that the risk management procedures are established based on the realistic and objective view of your working capital needs.
3. Working capital should be used in a corporate wide basis
This is considered to be one of the most effective working capital management tips as this helps in ensuring that the cash on hand of your business are used in a number of functions. This can be done by using the cash that your business generates from one location to another. In order for you to effectively implement this tip, you need to make sure that the following are in place: information access, good linkages between billing and production, good treasury practices, efficient banking channels and internal systems that can be used to move cash from one location to another.
4. Establish effective procedures in managing disputes
These procedures should be linked to customers. This move can be expected to be a major step in freeing up cash that have been locked in because of certain disputes to customers. You can also expect the dispute management procedures to improve customer service while freeing up a lot of time for legitimate activities such as cash collection, sales and order entry. The efficiency of your business can also be expected to improve as you can start to significantly reduce operating costs through this tip.
In conclusion, the working capital management tips mentioned can help you effectively measure the financial and operational efficiency of your business. As a result of this, it is advisable for you to continuously look for ways to improve the performance of your working capital; so as to increase the level of satisfaction of your customers.